Did you know someone selling “buttery soft leggings” from their basement or living room a
few years back? Yep, I’m talking about LuLaRoe, a multi-level marketing company that became
notorious for its cult-like membership and leaving thousands of distributors with unsold inventory,
even bankrupting some. In 2019, LulaRoe settled for $4.75 million out of court in Washington State
to avoid going to trial over their alleged pyramid scheme. They had to adjust their sales practices
in the Evergreen State. While the company is still in business, their distributor numbers
have dropped from 80,000 to less than 20,000, and it’s still in the middle of a number of lawsuits.
Hi, I’m Erin McCarthy and this is the List Show.
Today we’re going to talk about several notorious companies that were accused
(and sometimes convicted of) engaging in pyramid schemes and other scams, from Holiday Magic to
Kostcot Interplanetary (at least they didn’t lack for confidence). Let’s get started.
Let’s talk about the difference between a pyramid scheme and a Ponzi scheme. Some people use the
terms interchangeably, but they’re actually different variations of investment fraud. A
Ponzi scheme requires an investment from participants, with the promise that their
investment will passively multiply. And for the people at the top, it does—the money comes in from
new recruits at the bottom. But the people at the bottom are the ones paying the price; the money
they paid to get into the investment is typically paid to the people at the top as phony returns.
A pyramid scheme is more retail-oriented, relying on the recruitment of people to
sell a product—and the recruitment is how the scheme generates the most of its money,
not the product itself. The new recruits have to buy inventory and sometimes pay hefty fees
in order to sell the items. People on the bottom prop the whole thing up and can usually only
generate sizable revenue for themselves by finding new sellers to take their place on the bottom.
Both scenarios rely on new money coming in to fund unrealistic promises, but the inner mechanisms are
different. And let’s not forget about MLMs, or multi-level marketing. Now, multi-level
marketing is, in fact, legal. It can look like a pyramid scheme, but the difference is that an
MLM does actually pay sellers based on the sales they make. While they also have the opportunity
to make income by recruiting more sellers, it’s not the main—or only—way to make money.
Now, onto the schemes.
You’ve no doubt heard of Avon and Mary Kay Cosmetics. For a period in the ‘60s and
early ‘70s, Holiday Magic was right up there with them. The company started when a man named William
Penn Patrick purchased the inventory of a failing makeup brand. He dubbed his new line Holiday Magic
and began recruiting folks to sell lipstick, blush, powders and creams made from natural
ingredients. For an extra fee, his distributors could enroll in his “Leadership Dynamics” course,
where he taught people how to control their brain waves for the low, low price of $200. And that’s
just the beginning of the bizarre things inflicted upon Leadership Dynamics attendees. Among other
things, Patrick made participants crawl into coffins, get strapped onto a cross and endure
physical abuse. Patrick claimed it was all part of a big-picture strategy to help seminar attendees
appreciate what they had in life and prove that they were psychologically sound enough to move on.
The schemes made Patrick filthy rich, and he wasn’t exactly shy about sharing his success:
one company ad supposedly featured a photo of his yacht, accompanied by the copy,
“Doesn't every cosmetics company have a Navy? Probably not. But then every
cosmetics company isn't Holiday Magic." This guy would've fit right in on Twitter today.
The first lawsuit hit in 1973, with the FTC alleging that Patrick had stolen more than
$250 million from the staggering 80,000 people he had recruited for the scheme.
But before he could be brought to trial, Patrick was killed when his personal plane crashed while
he was trying to do stunts. The company was eventually found guilty of deceptive
trade practices, but even so, it carried on for several more years before fizzling out.
We’re not done with cosmetics schemes yet. As a “general” with
Holiday Magic, Glenn Turner claimed to have earned more than $30,000 per month. So,
when Holiday Magic went under, Turner smelled an opportunity. He founded Koscot,
which stood for Kosmetics (with a K) for the Communities of Tomorrow. And don’t
forget the “Interplanetary,” a truly ambitious tag for a door-to-door cosmetic sales company.
Just like its predecessor, Holiday Magic, Koscot was a bona fide pyramid scheme. Newbie
distributors signed up for $5,000, which earned them the right to sign sellers below them for
just $2,000. When the lawsuits started rolling in, the Pennsylvania attorney general noted that
each distributor was asked to bring 12 more people on. And then those 12 people were asked to bring
12 people each. If you follow this through just 12 tiers—hence the pyramid—the result
is 8,916,100,448,256 people... more than 2,000 times the number of people on Earth at the time.
Obviously, this wasn’t sustainable. Maybe that’s why Turner also founded Dare to be Great,
a motivation course and another page out of the Holiday Magic playbook. With Dare to Be Great,
participants bought “adventures,” a.k.a. sales courses, at levels from $100 to
$5,000. Turner’s “inspirational” techniques included yelling, “Money! Money!” at attendees.
Although both the FTC and the SEC came after Turner for Koscot and Dare to Be Great,
it was a third company called Challenge, Inc, that finally brought him down. The company was another
motivational course with the same shady practices, promising people huge incomes if they invested
five grand to sell the Challenge courses. In 1987, Turner was sentenced to 7 years in prison after
being convicted of 19 counts of conspiracy, fraud and promotion of a pyramid scheme. He served five
years, then returned immediately to motivational speaking, absolutely daring to be... something.
The early-to-mid 2000s was the forefront of the digital music industry,
so of course, someone found a way to build a scam out of it. BurnLounge recruited people
to open digital music stores, providing them with a prebuilt webpage to do so. How well
the store supposedly depended largely on the package that was purchased as
part of the deal. The lowest level was just $29.95 a year, while VIP would set you back
$429.95 annually. Selling music gave shop owners points, not money—unless they paid
an additional $6.95 per month to be part of the Mogul program. But the music was never the point.
While shop owners earned a paltry 50 cents per album sold, they earned up to $50 for recruiting
fellow shop owners and selling them packages. Company leaders told its 62,250 recruits that they
had the potential to make hundreds of thousands of dollars; CEO Juan Arnold told one audience that
the business model was a “license to print money.” But the truth was, it was nearly impossible for
most “store owners” to make any money at all. From 2005 to 2007, the company paid $17.4 million in
commissions. Of that, 66 percent went to the top 1 percent of sellers, and 85 percent went to the
top 6 percent. That left a meager 15 percent for the tens of thousands of people at the bottom.
The FTC declared BurnLounge a pyramid scheme and filed a lawsuit in 2007,
and by 2008, BurnLounge was kaput. In 2015, the FTC announced that 52,099 people who had
paid to be Moguls would be receiving a share of a $1.9 million settlement from BurnLounge.
Pyramid schemes aren’t all makeup and music. In 2012, a company called TelexFree conned
a shocking 1.8 million victims out of a total of $3 billion. The scam? Free internet phone calls to
Brazil and Latin America. Participants weren’t actually required to sell the product itself;
instead, they had to spend their own money to join and then buy ad space online. Of course, they were
also required to recruit others to do the same. It was later estimated that 2 percent of Telexfree’s
profits came from selling the actual VOIP product, while 98 percent was from new participant buy-in.
When authorities in both the U.S. and Brazil began investigating, the company abruptly shut down,
declared bankruptcy, and froze all members' accounts. Participants were out everything
they had invested. Unfortunately, there isn’t a happy ending here, but there is, at least,
a little bit of justice. In 2016, the president of Telexfree was sentenced to six years in prison.
And in 2020, a judge ruled that $150 million would be paid out to 100,000 of Telexfree’s victims.
The Kentucky Attorney General once called Fortune Hi-Tech Marketing
“one of the most prolific pyramid schemes operating in North America.” Founded in 2001,
the company claimed they had more than 160,000 representatives selling consumers a staggering
variety of products—everything from DISH Network to vitamins. These representatives
had to pay about $1500 annually in membership fees and products,
but 90 percent of them netted less than $15 a year. That’s right; $15 a year. Meanwhile,
Fortune’s top tier, “Presidential Ambassadors,” were raking in more than $1.2 million annually.
As with many pyramid schemes, Fortune promoted itself as a way to “financial independence,”
preying on people who were often in dire straits. The company was shut down by the FTC in 2013.
As of July 2022, the FTC was still sending out checks from the Fortune settlement;
a total of $4.6 million has been returned to victims so far. Sadly,
this works out to be just $41.23 per person, which doesn’t even come close to covering their losses.
Another group of people often in need of
cash? College kids. And that’s exactly who energy drink company Vemma targeted. Founded in 2005,
Vemma’s products of choice were beverages called Bod-E and Verve, purported to boost energy and
weight loss. They called themselves “the Young People Revolution” and recruited young adults
just out of high school. In order to sell the drinks, Vemma required their “distributors”
to buy starter packs that cost up to $600. But while the company itself raked in more than $200
million a year in 2013 and 2014, 40 percent of its sellers were making less than $1000 per year.
In 2015, the FTC set its sights on Vemma,
and by 2016, it had forced them to stop the pyramid scheme part of their business,
which meant no more incentives for recruiting new salespeople. In 2019, more than $2.2
million was given back to 28,224 Former Vemma sellers—an average of about $79 per person.
Thanks for watching the list show. If you want to learn even more about scams and pyramid schemes,
make sure to forward your name, email, mother’s maiden name, and social security
number to mentalfloss@totallyrealwebsite.edu. Or, maybe don’t. I’ll see you next time.