What convinces an apparently rational adult to get involved in a pyramid scheme?
Massachusetts attorney Douglas Brooks, who represents victims of marketing fraud on multiple levels, believes everything is in sales.
“They use a number of techniques to get people to lower their vigilance and stop thinking critically. They don’t treat it as a business, but as a way they can fulfill their dreams,” Brooks told CNBC . American greed. “
Thousands of people have signed up for Nxivm (pronounced nek’-see-uhm), the group founded by self-proclaimed guru Keith Raniere to promote his philosophy of “rational inquiry,” which he identified as the key to higher consciousness . Members, many of whom were recruited from wealthy families, would pay thousands of dollars for Nxivm courses. They could move forward within the organization and earn “commissions” to offset some of their costs by recruiting new members.
“You are taking a $ 5,000 course and as soon as you are done with it, you are told, ‘Now you are really ready to take the next one,” former Nxivm advisor Frank Parlato told American Greed “Nobody but Raniere and a couple at the top have earned any living wage.”
In October, a judge sentenced Raniere to 120 years in prison for his role in an offshoot of Nxivm that treated women as slaves, forced sex with him and branded his initials on their pelvic areas. The 60-year-old Raniere was convicted of extortion and sex trafficking, among other things. Prosecutors alleged in the 2019 indictment that Raniere sat on a number of “pyramid organizations” that were primarily intended to benefit him.
“For Keith Raniere it was about sex, money and power,” said former US assistant attorney Moira Penza to “American Greed”.
Like Nxivm, the group known as DOS – an abbreviation for a Latin phrase roughly translated as “Masters of Obedient Women” – was structured as a multi-tier organization where members were expected to recruit others. In DOS, Raniere was seen as a “grandmaster”. Recruits were called “slaves”.
Actress Sarah Edmondson, who became the first DOS member to bring abuse claims to the public in 2017, said her recruiter claimed the group had a high cause.
“She told me it was an international women’s group that was completely underground and a group of women working together to be a force for the good in the world,” Edmondson said. “I felt like I met the people I would work with to change the world.”
It was only later that Edmondson found out about the abuse, and Raniere was at the top of the pyramid.
Raniere, who has been held without bail since his arrest in 2018, is appealing his 2019 conviction on seven offenses. He did not respond to American Greed interview requests, but insisted not to commit a crime in an interview broadcast by NBC News prior to his conviction.
2018 Courtroom Sketch Keith Raniere, second from right, chairman of the NXIVM secret group, attends a trial in the Brooklyn neighborhood of New York.
During the trial, Raniere’s defense team argued that DOS women consented to their treatment. Even so, Raniere said in the interview that he regretted what happened.
“I apologize for participating in all of this – the pain and suffering,” he said. “I clearly participated. I was the leader of the community.”
In a legal multi-level marketing organization, the parent company creates a network of independent salespeople to sell their products or services. Raniere began his career in the 1980s as a distributor for one of the best known legitimate multilevel sales organizations, Amway.
A tiered marketing organization can become an illegal pyramid scheme if the focus and main source of income for members is on recruiting rather than selling the product.
Brooks, the Massachusetts attorney, said he was surprised at the rule Raniere wielded over his followers.
“He was clearly intelligent. But the idea that he could become this guru and attract all these smart, well-educated people and then turn this thing into a sex trafficking organization is just amazing,” Brooks said. The attorney led lawsuits against Raniere that arose from a previous multi-tier company – Consumers’ Buyline, which the New York Attorney General’s Office closed in a 1996 settlement in which Raniere did not admit wrongdoing.
It might be easy to dismiss Raniere’s supporters as gullible frauds. But Nxivm attracted legions of business executives, former government officials, and other prominent people who bought what Raniere was selling.
Angela Ucci, a businesswoman who joined Nxivm shortly after its inception in 1998 and was promoted to senior trainer, remembers Raniere as humble yet persuasive. She only spoke to “American Greed”.
There were sexual things. There were business matters. There was secrecy.
former Nxivm member
“I think he was a master at figuring out what made you tick and what you were interested in,” said Ucci.
Ucci publicly broke up with Raniere in 2009 – long before DOS was founded – after discovering several inconsistencies between his teachings and actions, including sexual advances, which she rejected. She was one of a group of defectors who claimed Nxivm owed them more than $ 2 million in unpaid commissions and other obligations that Nxivm denied.
“There were sexual things. There were business things. There was secrecy,” she said.
Other former members described emotional and physical abuse. At least one Nxivm member has committed suicide.
Stay on guard
Brooks said that people who assume they will never find themselves in a similar situation do so at their own risk.
“The key is always to be skeptical,” he said.
Of course, not all marketing companies are illegal pyramid schemes on multiple levels. However, the Federal Trade Commission, which offers tips on how to spot the difference, warns that even in the legal programs, success is not as easy as the sales pitch suggests.
“Most people who join legitimate MLMs make little or no money,” the agency says.
The FTC says to watch out for these warning signs of an illegal pyramid scheme:
- Promoters make extravagant promises about your earning potential.
- The organizers are keen to attract new distributors to their distribution network in order to make money.
- Promoters play with your emotions or use high pressure sales tactics.
- Merchants buy more products than they want to use or can resell just to stay active with the company or to qualify for bonuses or other rewards.
Brooks said the recruiting process in pyramid schemes makes them particularly difficult to spot.
“Usually your introduction to this matter will come from someone you know, a friend or family member, or a member of your church or community organization,” he said. “It’s a trustworthy relationship to some extent.”
The pitches are also intentionally vague, glossing over the improbability of ever making money.
“You’re not saying, ‘I have this organization where you have to recruit all of your friends, and if you recruit enough people and they recruit enough people and their recruits recruit enough people, you’re going to get it rich,” Brooks said.
“You have to be on your guard and ask questions about it. And the more questions you ask, the more you will find that the person you are recruiting probably doesn’t know much himself.”
In addition to Raniere’s conviction, five other Nxivm leaders pleaded guilty. Most have yet to be convicted.
Dozens of former Nxivm members, led by Edmondson, have filed civil lawsuits against Raniere and others, as well as Nxivm himself, seeking unspecified damages for their ordeal. The case is on hold as the remaining criminal cases expire, so neither Raniere nor the other defendants have responded.
“Like all fraudsters, pyramid promoters adapt their misrepresentations to make them plausible for the target group,” the lawsuit said.
See how Keith Raniere built a system of terrible abuse in the shape of a pyramid. Catch a brand new episode of “American Greed” on Monday, January 25th at 10pm ET / PT only on CNBC.