Pyramid and Multilevel Investment Schemes: When the Next Recruit Funds the Payout

Pyramid and multilevel investment schemes can turn money from new recruits into supposed investment earnings. If you administer a commission plan, maintain participant accounts or handle payments, you may see the difference between the business in the sales presentation and the business funding the payouts. The question is concrete: who paid for the earnings, a customer buying a product or the next person paying to join?

This page follows recruitment compensation, customer revenue and payments to earlier investors. If you are considering reporting securities fraud, those connections give us something specific to examine with you: what participants were promised, what they paid and where their money went.

What Makes a Pyramid Scheme a Pyramid Scheme?

A pyramid scheme ties earnings to recruiting participants and the money they contribute. The compensation plan tells an insider what opens the door to a payment: a sale, a subscription, a recruited member or another position in the hierarchy. The transaction records show which of those events actually brought money into the business. The SEC has brought securities fraud and unregistered-offering charges over membership packages sold with promised investment returns, as its HyperFund case shows.

The SEC’s Race Cycler case gives a compact example. The agency described investors paying $230 to become members, then recruiting others to move up the pyramid and earn reward points convertible to cash. The membership payment, recruitment position and cash entitlement were parts of the same arrangement.

In a multilevel compensation plan, an insider needs to understand both the participant’s own activity and the activity of people recruited beneath them. A customer-sales total can conceal the distinction between someone buying a product to use and an investor buying access to compensation. The ZeekRewards allegations show why the definition of a customer belongs beside the sales ledger.

What Is the Difference Between a Ponzi Scheme and a Pyramid Scheme?

A Ponzi scheme pays earlier investors with later investors’ money while presenting those payments as investment returns. A pyramid scheme rewards recruitment and participant payments. The same operation can do both: recruitment brings in the money, commissions reward the recruiters, and payments to earlier investors help sell the investment story.

That overlap appears in the SEC’s allegations about Forsage, which combined recruitment earnings with payments funded by new investors. It also appears in the TelexFree resolution. In September 2018, TelexFree, Inc. and TelexFree, LLC settled SEC charges and admitted that the bankruptcy court had found they operated a Ponzi and pyramid scheme. The SEC described the Massachusetts companies as targeting Latino communities.

For an insider, the useful distinction is what each payment represents and where its funding originated. A recruiting commission and a purported investment return can leave the same account for different stated reasons.

What Records Show Whether the Sales Are Genuine?

Customer orders, participant accounts and bank or wallet movements can show who funded the compensation plan. We compare the advertised source of earnings with incoming payments, the rules for earning commissions and actual outgoing payments. The industry’s ordinary transaction trail separates money invested in a business, money earned by its operations and money distributed to investors.

The SEC complaint concerning ZeekRewards described a penny-auction business alongside an affiliate compensation system. Participants paid for bids used in merchandise auctions. To qualify for affiliate rewards, investors had to meet conditions that included a monthly subscription, enrolling auction customers, and selling bids or buying bids to give away as samples.

The SEC complaint also described Matrix bonuses available to subscribers who recruited at least two Preferred Customers. Those customers were themselves investors enrolled in monthly subscriptions. We see recruitment with a customer label.

The alleged payout arithmetic makes the issue sharper. The SEC complaint said ZeekRewards would owe nearly $45 million per day if all qualified affiliates requested their daily rewards in cash instead of points. It put actual daily revenue at approximately $5 million, based almost entirely on new affiliate subscriptions and VIP bid purchases.

An insider may be able to explain distinctions that disappear inside a single revenue total:

• Compensation rules: what a subscription or recruited participant made someone eligible to receive.
• Customer activity: whether bids were sold to customers or purchased by affiliates and given away.
• Participant balances: whether a reported reward remained in points or became a cash payment.
• Money movement: which incoming receipts funded commissions, rewards and withdrawals.

Someone who maintained the accounts may know why a payment received a particular label and who decided to use it. That knowledge lets us connect the entries to the decisions behind them.

Forsage and Recruitment Payments on Blockchains

The SEC alleged that Forsage used smart contracts on the Ethereum, Tron and Binance blockchains to run a recruitment-funded operation. In its August 2022 announcement, the agency said the scheme raised more than $300 million from millions of retail investors worldwide, including in the United States. Its civil case charged founders and promoters with fraud and registration violations.

According to the complaint as described by the SEC, investors earned profits by recruiting others, and assets from new investors paid earlier investors. The agency also described U.S.-based promoters endorsing Forsage through its website and social media.

For someone who worked on the platform or its promotion, the relevant connections include the recruiting message, the participant transaction and the payment it triggered. We examine the smart-contract transactions alongside the claims made to recruits. The technology identifies how money moved. The compensation arrangement explains why someone received it.

HyperFund’s Memberships and the Mining Pitch

The SEC alleged that HyperFund sold membership packages promising high returns from supposed crypto asset mining operations and an association with a Fortune 500 company. Its January 2024 announcement said the operation raised more than $1.7 billion from investors worldwide. The agency alleged that HyperFund had no real revenue source beyond money received from investors.

The SEC’s fraud and registration charges concerned a founder and a top promoter. Its complaint alleged that they knew, or recklessly failed to recognize, the recruitment-funded nature of the business. For someone in finance or member support, the important comparison is the revenue source described to investors against the receipts actually available to fund their returns.

What Are the Red Flags of a Ponzi Scheme?

Promises of high investment returns and a gap between claimed business earnings and actual receipts are warning signs illustrated by the HyperFund allegations. A membership presentation may credit mining income while the accounts identify investor deposits as the money coming in.

Recruitment incentives make that comparison more revealing. The person administering the compensation rules can explain what earned a payment, while the person handling receipts can explain what funded it. We bring those accounts together when assessing a suspected pyramid and Ponzi arrangement.

Why an Insider’s Account of the Payments Matters

Whistleblowing was the most common detection method in the occupational-fraud cases examined by The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018. It also found that detection through whistleblowing became more likely as more people participated in the fraud.

A different study, Do Corporate Whistleblower Laws Deter Accounting Fraud?, a 2019 working paper hosted by MIT Sloan, examined companies held by state pension funds as states adopted False Claims Acts. It estimated a 5% to 9% reduction in accounting-fraud likelihood for exposed firms.

In a recruitment-funded investment operation, that explanation may connect the compensation rules, the customer label and the source of a payout. You may know how those entries were made because maintaining them was your job. If you administered or promoted the plan yourself, your own role is something to discuss with our whistleblower experts. We work with you to connect that knowledge to the promises investors heard and the transactions behind them.

An eligible SEC whistleblower award can range from 10% to 30% of qualifying collected sanctions when the SEC action exceeds $1 million in monetary sanctions. We assess the award opportunity attached to your evidence with you, including any separate issue involving fraud against government money. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What Funded the Payout

If you can explain how recruits became customers on paper or how their payments funded someone else’s earnings, speak with our whistleblower experts about the operation you know. We build the case around the compensation plan, the promises and the money, and bring in securities fraud whistleblower lawyers who understand investment schemes. We stay beside you throughout the case.