The new digital pyramid scheme

Rico Gagliano Dec 4, 2009

The new digital pyramid scheme

Rico Gagliano Dec 4, 2009


TESS VIGELAND: After all the hype and headlines surrounding Bernie Madoff, you’d think people would realize that making money and investing it aren’t simple. If they were, we’d all be rich.

But as Marketplace’s Rico Gagliano found out, some lessons are hard to teach.

Rico Gagliano: The story begins with a marketing firm called TubeMogul. Among other things, they offer a free service that lets anyone track how well their videos are faring on YouTube. And earlier this year, TubeMogul director David Burch noticed an odd bunch of people signing up for the free service.

David Burch: I was looking at their email addresses, and it was like “wealthbuilders1234.” And they would always use the word “cash gifts,” “cash gift to get rich,” “cash gifting,” that kind of stuff. And I had no idea what that meant, really.

So he searched for YouTube videos tagged with those phrases and found he’d stumbled upon a huge subculture of homemade get-rich-quick videos

Music from a get-rich-quick YouTube video: Here comes the moneeeeey! Here we go!

This is a typical “cash gifting” video. It’s a single shot of a guy in his living room talking right into the camera.

Rob, on a YouTube video: Hey, this is Rob from Mississippi again. It’s Monday morning.

Eventually he takes out a sealed overnight delivery envelope. Forgive the sound quality; like I say, this is homemade.

Rob: Um, this was dropped off about 15 minutes ago by UPS, and inside the package here, there should be a $3,500 cash gift. So what I wanna do is open it up here…

Guess what? The package is stuffed with cash.

Rob: That’s 35 one-hundred-dollar-bills that was sent to me by an individual that I spoke to over the weekend.

At first TubeMogul’s David Burch found these videos puzzling, but kind of funny. Then he realized how many there were. Right now, he says there are about 5,000 of them on YouTube alone, racking up a massive 21 million views. And then, he got concerned.

Burch: Some of them would even describe what sounded like a very straightforward pyramid scheme. They’d say stuff like: “You send me $100, you join the network and then you get 100 people to join the network and then you are rich in a week” — they’d say stuff like that, and I was like, “Huh. Is it a pyramid scheme if they’re being honest that it’s a pyramid scheme?”

The answer? Yes it is.

Alison Southwick: It’s a pyramid scheme! At the end of the day, it’s a pyramid scheme.

See, I told you. That’s Alison Southwick of the Better Business Bureau. The bureau checked out the cash-gifting phenomenon, and quickly realized it’s the latest wrinkle on an old scam.

Southwick: Cash gifting really sprung up in the 90s. It really flourished among already-established communities such as women’s circles or church groups, and they were often called “gifting clubs” or “dinner parties” or even “investment clubs.”

Some gifting clubs even portrayed themselves as charities, dedicated to changing members’ lives. They’d give their groups names like “Women Empowering Women.” But those clubs, and the new ones online, all have one thing in common: their methods.

Karen Hobbs is an attorney for the Federal Trade Commission.

Karen Hobbs: New members are instructed to give cash gifts, which are funneled to the highest-ranking club members. The new club members are promised that, “Look, if you get additional members to join the club, you’re going to rise to the top and you’ll receive big money.”

Another YouTube cash-gifting video: As your team grows, so do your residual cash gifts. For life.

It’s a textbook pyramid scheme. And it’s 100 percent illegal, no matter how much cash gifters insist otherwise. One thing that a cash gifter will try to get you to believe is that it is legal to do this, that you can write this donation, this gift off on your taxes.

But just ’cause you can legally write off a gift, doesn’t mean it’s legal to use gifts as part of a pyramid scheme. Which leads me to ask: since it’s so clearly a crime, why are thousands of people so brazenly promoting cash gifting online

Hobbs: I think that they are depending on the Internet, which is a very quick, very anonymous method of scamming people out of money. The theory would be to get your word out there, grab what you can, and then go back offline.

Scammers are also helped along by shame. The FTC received only 1,800 complaints about pyramid schemes last year. Hobbs says many victims are embarrassed to admit they’ve been conned. And some cash gifters simply refuse to believe it’s a con.

David Burch remembers getting a call from a client. He’d shut down her TubeMogul account after he found she was using it in a cash gifting scheme.

Burch: She was so convinced that it wasn’t a scam. She didn’t get that it was a scam, and I sort of tried to point her, you know, like, “Hey, I don’t think this is right.” And she just sounded like this desperate woman who’d lost everything she’d ever had, and I felt so bad.

Mournful cash-gifting YouTube video: Delinquency rates, they’re accelerating, they’re not getting better. Foreclosure rates, they’re accelerating, they’re not getting better.

This is another cash-gifting video I found online. Over mournful music, TV news clips rattle off a laundry list of recent bad economic news.

Mournful cash-gifting YouTube video: Consumer income is down, and their jobs are going away — there’s no signs of job stabilization yet.

Then, halfway through, titles tell viewers there’s hope, a quote: “Community that provides a gateway to prosperity.” Doesn’t that sound nice? A welcoming tribe who’ll magically make hard times vanish? With the American Dream further out of reach, it’s easy to see how cash gifters can sell some people on a pipe dream.

In Los Angeles, I’m Rico Gagliano for Marketplace Money.

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