Over the past two years, the Securities and Exchange Commission (SEC) has stepped up enforcement actions against pyramid schemes and related affinity frauds. Last week, in a speech at the University of Illinois at Chicago, Andrew Ceresney, director of the SEC’s Enforcement Division, addressed his division’s most recent efforts to combat these frauds. In particular, Ceresney emphasized the work performed by the SEC’s Pyramid Scheme Task Force, begun in June 2014.

A pyramid scheme is a fraudulent business model in which participants earn money by recruiting new members. It purports to sell a product or service, but in reality, simply pays participants out of the start-up fees invested by new members. Most pyramid schemes today are designed to look like legitimate multilevel marketing companies. While the Internet has enhanced the ability of multilevel marketing companies to expand their customer bases, it has enabled scam artists to do the same. Ceresney emphasized the role that social media has played in many recent pyramid schemes: “Today’s scam artist can leverage social media and other technologies to turn what, ten years ago, might have been a $5 million fraud involving a few hundred investors, into a $100 million scam ensnaring tens of thousands of investors worldwide.” The SEC has attempted to combat these schemes through a variety of tools, including fraud charges, securities registration violations, and clawing back funds.

Ceresney expressed particular concern about the rise of affinity frauds. Affinity frauds are pyramid schemes or Ponzi schemes (investment-based, rather than product-based, schemes) that target members of identifiable groups, such as ethnic or religious communities. Ceresney highlighted recent SEC efforts to thwart a Ponzi scheme targeting veterans, run by a former Marine. He also discussed several pyramid schemes that targeted Latino and Indian-American communities in the United States. Affinity frauds are a particular problem because recruits may be more trusting given their shared background or identity with the promoter. Moreover, promotors of affinity frauds often first target respected leaders in the affinity group as a way to convince others to participate.

Due to a rise in complaints regarding these frauds, the SEC formed the Pyramid Scheme Task Force in June 2014. “The goal of the Task Force is to target these schemes by aggressively enforcing existing securities laws and increasing public awareness of this activity.” The Task Force now has more than 50 staff members at the SEC and coordinates with other federal agencies. The Task Force also emphasizes public outreach, including educational materials and providing translations for charging documents into the native languages of targeted affinity groups. The SEC’s efforts here should benefit the multilevel marketing industry. Often, potential recruits shy away from joining multilevel marketing companies because of their inability to distinguish between a legitimate business and a scam. The SEC’s educational resources and aggressive enforcement against fraudsters will help nullify that chilling effect.