YourTravelBiz (YTB) sued by Attorney General for being "gigantic pyramid scheme"

Yesterday California's Attorney General, Edmund G. Brown Jr., announced a lawsuit against (YTB) for being a "gigantic pyramid scheme." He says that the multi-level marketing company recruited tens of thousands of members with false earnings claims.

YTB was supposed to a business through which members could operate online travel agencies. In reality, it was nothing more than a pyramid scheme meant to make those at the top rich, while thousands of people below them lost a lot of money. The operation is accused of being a pyramid scheme because the members were paid for recruiting new members, regardless of whether they sold any travel services.

Members pay $450 to join the scheme, and a monthly fee of $50 to stay active. In 2007, it is alleged that there were over 200,000 members, and that only 38% of them made any money from selling travel services. The median income for those making commission on travel services was only $39. (You read that correctly... not even enough made all year to pay for one month of fees!)

Mutli-level marketing companies like this pop up all over the place. Their defenders claim they are legitimate business opportunities because there is a product or service being offered. Yet those involved with the schemes soon realize that recruiting is the real name of the game, making these "business opportunities" appear to be more like pyramid schemes.

One recent player in the multi-level marketing game is Shop To Earn, a program which recruits "brokers" who each pay about $448 to become a member. As a member of Shop To Earn, they can be paid a small percentage of sales when they and others shop online using affiliate links. The real focus of Shop To Earn, however, is recruiting in new members who will pay the $448 fee to join (plus an annual renewal fee of $119). This doesn't seem all too different than that program that California is going after.

Schemes like this really only benefit the owners of the company and a handful of people at the top of the recruiting pyramid, usually the ones who get into the program early. In terms of real money to be made from shopping online, it would take thousands of dollars of shopping just to recover the membership fee. The payouts are skimpy, often less than 5% of purchases. Even at 5%, it would take $9,000 of shopping just to recover the initial sign-up fee.

There are also monthly minimums for those who want to be paid commissions on the people recruited into their downline. $100 a month must be spent on the "Shop To Earth" portion of the Shop To Earn site to even "qualify" to receive commissions. That's another $1,200 a year out of the pocket of the member to even be eligible to earn any money.

Consumers would do well to stay far away from these schemes which promise financial freedom to them (and a few of their friends and family). Studies suggest that 99% of participants in "business opportunities" like this lose money, making it a horrible "investment' for most consumers.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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