Federal-State Surfing Catches a Wave of Potential Internet Scams; Over 500 Pyramid Operations Put on Notice

Share This Page

For Release

Four federal agencies and 70 state and local law enforcement officials from 24 states have notified operators of over 500 websites that they may be promoting illegal pyramid schemes in violation of state and federal laws.

“We’re putting scam artists on notice," said Jodie Bernstein, Director of the Federal Trade Commission’s Bureau of Consumer Protection, at a press conference where she unveiled the results of “Internet Pyramid Surf Day.” "The Internet is not going to be a new marketplace where scam artists roam free. We’ve sent the message, 'Clean up your act or close down your site.’ And we plan to follow up to see that they do," Bernstein said.

The law enforcement surveillance was coordinated by the FTC and announced during the “Fourth Annual Fall Internet World '96 Conference” in New York City. On Monday, December 9, the federal, state and local law enforcement officials surfed the Internet to locate those sites posting possible pyramid scams. Participants preserved the information found at each site for possible future law enforcement action.

Various law enforcers identified Internet sites that contained the telltale signs that they may be pyramid operations. Site operators were sent e-mail messages warning them that pyramid schemes were illegal, describing the characteristics of illegal pyramids and providing the FTC’s home page address to help entrepreneurs and consumers distinguish between illegal pyramids and legal multi-level marketing plans. The web-sites will be revisited in the future, and if evidence suggests that they are illegal operations, further actions may be taken.

"In just one day, we identified over 500 web sites that make offers which may involve illegal pyramid schemes. These schemes now constitute the fastest growing type of Internet scams by some accounts," Bernstein said. "And there’s an alarming irony in this. Ten years ago, pyramid scams were all but a thing of the past. Today, we have a new marketplace, the Internet, which is hot and high-tech. And here come the pyramid scams again, as old as Methuselah, disguised in high-tech electronic garb and new-age jargon, trying to make a comeback.”

“Internet Pyramid Surf Day” was intended to complement the existing law enforcement work of the government agencies. The FTC has brought 15 cases against on- line scams in the past. The effort’s objective is to educate businesses using the Internet about the law on pyramids and deter those who are violating the law from continuing to do so.

The Securities and Exchange Commission, Federal Communications Commission, U.S. Postal Inspection Service, 20 state Attorneys General, five state securities regulators and four District Attorneys, participated in “Surf Day.”

"At SEC Enforcement, our Internet program entails aggressive surveillance, investigation and prosecution of Internet conduct that violates the federal securities laws," said John Stark, Special Counsel for Internet Projects at the SEC Enforcement Division. "We also encourage self-policing through our Enforcement Complaint Center <www.sec.gov>, and in conjunction with the Commission’s Office of Investor Education and Assistance, we emphasize education and cooperative efforts with federal, state, self-regulatory and industry organizations. Joint operations like Surf day increase the effectiveness of our Internet program to make the Internet safer for all investors."

"Promoting chain letters on the Internet is simply putting old wine in new bottles, " says Chief Postal Inspector Kenneth Hunter. "Even though communicated via the latest telecommunications medium, electronic chain letters are identical to old fashioned scams, in that they are likely to profit only the originator," warns Mr. Hunter. "Further, they run the risk of violating the federal lottery statutes if they cause others to perpetuate the chain through the U.S. Mail."

Bernstein said that the agency has also developed education messages for consumers. "We hope to help consumers avoid these pyramid schemes by offering tips on what to watch for -- especially money making schemes that claim that you will make money by recruiting new members or 'distributors.’”

The consumer education campaign is being promoted by the Interactive Services Association, primarily through Project OPEN (the Online Public Education Network). The effort is supported by America Online, AT&T, CompuServe, Microsoft and NETCOM who will be incorporating hyperlinks to the FTC web site. The FTC web site will offer the following advice for consumers:

  • Beware of plans that ask new distributors to spend money on high-priced inventory. These plans can collapse quickly -- and may be illegal pyramids in disguise;
  • Be cautious of plans that claim you’ll make money through continued growth of your 'downline’ -- the commissions on sales made by new distributors you recruit -- instead of through sales you make yourself;
  • Beware of plans that promise enormous earnings or claim to sell miracle products;
  • Don’t pay or sign any contracts in an "opportunity meeting" or any other high- pressure situation;
  • Do your homework. Check out any plan you intend to invest in with the local Better Business Bureau and state Attorney General.

The Better Business Bureau (BBB) system is distributing educational materials through its BBB Web Page (http://www.bbb.org) and network of Better Business Bureaus to advise consumers how to identify pyramid schemes and other online scams. Local BBBs will also include tips on avoiding online fraud in their monthly newsletter mailings to 240,000 businesses. In addition to helping educate consumers on how to avoid potential scams, the BBB is launching a program to assist consumers in separating the legitimate online offer from the dubious one. The new BBBOnLine program, which will be operational in early 1997, will assist consumers in identifying ethical businesses on the Internet, and provide businesses with a means to demonstrate their commitment to ethical standards in the online marketplace.

Copies of the consumer and business education materials are available on the FTC’s web site at http://www.ftc.gov/bcp/conline/edcams/pyramid/index.html (no period). Copies also are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202-326- 2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov

Contact Information

Media Contact:
Victoria Streitfeld or Claudia Bourne Farrell
Office of Public Affairs
202-326-2718 or 202-326-2181
Staff Contact:

Eileen Harrington
Division of Marketing Practices