Money-chain letters are illegal, but why?
November 28, 2005 11:50 AM   Subscribe

OK, I now know that money-maker chain-letter implementation is illegal, but my big question -- why? Is it for the protection of dumb people? I'd have to say the fact that it didn't work is the protection of dumb people, but shouldn't be illegal.

This may be the dumbest question ever, but seriously, explain to me how this could be wrong. How isn't all of this completely my risk, just like if I wanted to buy a lottery ticket if I wanted, because I wanted to risk it despite the odds?

Ref: FTC and USPS

I just got one in the mail and it seems promising and legitimate. The process makes loads of sense -- and it would be completely my fault of having lost any money from it. I understand a list broker (should I opt to buy from the one the letter suggests) would be getting loads of business, but really, is that not a legitimate business? There are thousands of list brokers who sell names just the same.

I think the government should be obligated to inform the public of the risks involved, yes, but not outlaw it. If I want to try it out, that should be my own business. If I want to send a freakin' dollar in the mail I should be able to if I want, regardless of the purpose.

This particular letter has the usual list of names (6) that you bump up and such. With the dollar to send to the 6 on the list, you also include a note remarking "add me to your mailing list." This is the service that the recipient provides the money-mailer, in exchange for the dollar. Even if I never get mailed anything, isn't it my business of whether I send a freakin' dollar to John Q. Emptypockets? So you bump the top person off the list, and add your name to the bottom.

Then you send the same letter out to 200+ people after getting a list of names from a list broker (one is suggested, but I was going to use someone else because the person listed doesn't have a website although they do have a BBB record (and it's a good one)). Whether I am wasting my money pursuing these services is my freakin' business, and it should be set apart from the chain letter's fault because it's completely my choice. If you're just an idiot and fall for something dumb, I honestly think you deserve to lose whatever you lost. It was totally your risk! How does this not apply to any business ever conceived?

Someone needs to spell out the 'mathematical impossibility' to me, as the USPS says. The letter remarks:

"How does it work? When you send out 200 letters, it is estimated that at least 15 people will respond and send you $1.00 (15 people x $1 = $15). Those 15 people mail 200 letters each and 225 people (15people x 15 responses each = 225) will send you $1.00 ($225). Those 225 people mail 200 letters and get 15 responses, meaning 3,375 people send you $1.00 ($3,375). Those 3375 people mail 200 letters and get 15 responses, and 50,675 people send you $1.00 each ($50,675). Those 50,675 people mail out 200 letters each and get 15 responses, meaning 759,385 people send you $1.00 each. At this point your name drops off the list, but you've got $813,615."

Sure, you may not always get 15 people each time, you could get more or less, but it varies per each mailing. The people you are mailing out to are individuals who have requested money-making opportunities within the last 30-60 days, so it's the right demographic, not just some random person from across the street. Even if you only got 2 responses out of 200 at one point, their particular mailings could snag 30, and shake up the mix but you'd still end up with a fair bit of change, if it was done right (yeah yeah "IF" it was done right -- but that's part of any risk, ever -- IF the ropes are strong enough, IF the parachute was folded properly, IF there's enough gas in the tank, etc.) But, if it turns out profitable for that person, they may mail the same letter out again to a new list, which pretty much doubles your chances of branching off the tree in a new direction and getting even more, such as if it worked so well that the 3rd person mailed the same letter again to 500 people this time. Your name would still be on the same row, and you'd get the same amount of dollars as the mailer did responses from that particular segment.

It's not cheating someone out of something, it's all very plain-as-day explained right in front of you, is it not? How could that possibly be fraudulent?
posted by vanoakenfold to Law & Government (20 answers total) 1 user marked this as a favorite

Sorry, didn't see you linked to the same page, but that's still where your answer is... it's gambling.
posted by mkultra at 12:03 PM on November 28, 2005

USPS says it's illegal because it's a form of gambling. It is illegal in Canada for the same reason. Both countries also prohibit pyramid selling

You also have no way of verifying the identities of the people on the list. Maybe they're all the same person.

An explanation of why chain letter contacts are rapidly exhausted.

Finally, getting 15 of 200 people to respond would be phenomenal. Well-funded direct mail campaigns result in 2 to 3% response rates -- and that's with leads, not sales.
posted by acoutu at 12:07 PM on November 28, 2005

This may be the dumbest question ever, but seriously, explain to me how this could be wrong. How isn't all of this completely my risk, just like if I wanted to buy a lottery ticket if I wanted, because I wanted to risk it despite the odds?

Right, it is just like buying a lottery ticket. And just like running your own lottery, sending chain mails is illegal.
posted by delmoi at 12:10 PM on November 28, 2005

Uh-oh, guess that "Funky Sock Exchange" chain letter I did could get me in trouble!
posted by ThePinkSuperhero at 12:14 PM on November 28, 2005 [1 favorite]

A warning about those numbers. I use to work for a direct marketing company. We used highly targeted lists all of the time. The expected response rate was 2-3%. If a client got 5% on a particular mailing he was ecstatic. Not one mailing campaign in over three years of mailing ever got above a 5% response rate. (And yes, some of the deals sounded just as good as yours and were sent to highly interested prospects.)

Anecdotally, of course the deal looks good. Every such deal is designed to look good. But if it was anywhere near as good as it seems (and you make a valiant effort to rationalize the scheme) wouldn't everyone be doing it?

Finally, to answer your question. It seems to me that a policy of caveat emptor is a poor policy to endorse. It puts great pressure on the buyer while not holding the seller accountable in any way. Effectively it entices the sellers to attempt all sorts of fraudulent behavior because they aren't responsible for damages done to the buyer. Do you really want to have a government that effectively preemptively absolves one-half of a contract partnership of wrong doing?
posted by oddman at 12:23 PM on November 28, 2005

Pyramid schemes, often called 'Ponzi Schemes' after a 1920s conman who used a variant to rake in millions before he was eventually arrested, are illegal because they are a form of fraud.

Consider the analogy of an investment broker who promises investors impossible returns on their investments -- he or she is guilty of using deception, and therefore has committed fraud.

Ponzi / pyramid schemes are a simpler form of the above analogy. They don't explain that the statistical probability is that 70% of those who participate will receive absolutely no return on their contribution when the scheme inevitably fails under the weight of exponential growth to satisfy the need to find new participants. In other words, the promise (or implied promise) of a return to all who participate is fraudulent.

When the initial outlay to participate is only $20, it seems relatively harmless, but there have been any number of enterprising con artists who have launched Ponzi schemes where the buy-in price is hundreds, sometimes thousands of dollars. The more convincing con artists find novel ways to describe and structure the scheme as something different from a traditional pyramid scam, but the end result is the same: the majority of 'investors' will be left with nothing when the pyramid collapses due to saturation (and the important point to understand is that in both small outlay and large outlay pyramid schemes, the pyramid will always collapse).

You might find this link interesting for further reading: Federal Trade Commission: Pyramid Schemes.
posted by planetthoughtful at 12:31 PM on November 28, 2005

Also...your math is fine as long as you just consider the responders...but if you calculate total recipients, by the time you get to round 4 (50,675 responders) you will have had to reach 1.6 BILLION people. Good luck with that. ;)
posted by cyclopz at 12:40 PM on November 28, 2005

Chain letters are always a scam.

Suppose it takes 10 sales generations for you to start getting money. That means that it takes
- 10 sales by you in generation 1
- 100 in generation 2
- 1,000 in generation 3
- 10,000 in generation 4
- 100,000 in generation 5
- 1 million in generation 6
- 10 million in generation 7
- 100 million in generation 8
- 1 billion in generation 9
- 10 billion in generation 10

The earth's entire population is less than 10 billion. Thus, it's impossible for even the people in your generation get paid off.

However, you have to take into account the generations that have already bought the letter. That is, there have, in theory, already been 9 generations by the time it gets to you. Thus, the letter has to be sold 10 billion times for the first generation you know about to be paid off. By the time you get paid off, the number of purchasers will have to be 10 quintillion.

And that is only for the currect generation. You have to add in all the prior number of buyers from prior generations, i.e., 10 quintillion + 1 quintillion + 100 quadrillion + ... + 1.

But of course, those prior 9 generations never existed, and the ones after you will never exist. Remember that this is a SCAM. The con man who starts the chain letter creates imaginary prior generations. All of the names below yours are aliases of the scammer.

You'll be selling the letters to your friends and relatives, all of whom will be sending money to the scammer, selling the letters to their friends and relatives, and so onl Every single payment will go to the scammer, since there aren't enough people in the world interested in buying a chain letter to get through enough generations for anyone but the scmmer to start getting money.

That's why chain letters are illegal. They're not gambling. They're theft.
posted by KRS at 12:40 PM on November 28, 2005

Is it for the protection of dumb people?

I don't think it's for the protection of dumb people - it's for the protection of people who (a) don't know how the particular scam works, and (b) who can be convinced to believe what they want to believe. And (b) encompasses everyone, to some extent. Sometimes it's just harder to convince people of what they want to hear. I hate to say it, but it sounds like you are nearly convinced to believe what you want to believe. If pyramid scams were legal, you'd be hard-pressed to make any kind of scam (e.g. 409) illegal, because the principles are not fundamentally different, only the amounts.
posted by advil at 12:40 PM on November 28, 2005

Wiklipedia has a couple of great articles about Ponzi Schemes and Pyramid Schemes, as someone above mentioned (but didn't link).
posted by mrbill at 12:51 PM on November 28, 2005

Erm, the anatomy of a chain-letter is:

a) scammer creates letter with his name at top, creates 9 or 14 or 19 fake names below that
b) sends it to you, with request for you to send money to scammer and 9 or 14 or 19 fake people, and remail the letter
c) scammer collects the money you send, walks away laughing.

Right? Think about how they start - this is how they have to begin. The first guy isn't paying anyone anything.

Which is why I wonder why you'd want to participate in a chain-letter scheme. Don't you want to start your own instead? Write your own letter, put your name at the top, and send it out. That way, you don't have to pay out to the people above you on the list, and you still get all the benefits. As soon as someone falls for it.

As to why this is illegal, well, theft-by-deception is the logical counterpoint to laws that make theft-via-force illegal. If you can't steal-via-force, just convince the mark to give you his money voluntarily. Why shouldn't theft-via-deception be illegal?
posted by jellicle at 1:14 PM on November 28, 2005

Right, it is just like buying a lottery ticket. And just like running your own lottery, sending chain mails is illegal.

Actually, that's not really the case. It's unlikely that the overwhelming majority of people who buy lottery tickets are being led to expect a profitable return each time they buy a ticket. Lottery results are published, and anyone interested can inform themselves of the reality that only a lucky few win anything substantial from them.

Pyramid schemes work on a different dynamic: the promise that everyone who participates can / will profit. They don't explain that the only way to profit from even a very popular pyramid scheme is to be in one of the very top echelons of the distribution chain (ie in one of the first few levels beneath the con artist who initiated the scam); everyone else will either receive only a part of what they invested, with the overwhelming number receiving nothing at all. It's the predictability of this outcome, along with no attempt to disclose that predictability, that makes it fraudulent. And, let's face it, how much serious thought would you give it if the email / letter contained the clause: "Disclaimer: 70% of the participants in this scheme, which probably includes you, are going to get absolutely nothing. Join now!"

Pyramid scams, by the way, can be devastating to small communities when they take hold. We had an example not too many years ago in a small town to the north of where I live where people were being threatened and assaulted by friends, family members, neighbors, coworkers etc for refusing to participate in that particular scheme, as people who had 'invested' became more and more desperate to see any return at all on their money. The reason why they're particularly cruel for small communities is that most people know most other people in the community, so it becomes common knowledge who has had the common sense to stay out of the scheme, and they often get blamed for why the pyramid is collapsing.

So, illegal, and very much should be.
posted by planetthoughtful at 1:21 PM on November 28, 2005

Interesting comments here. I always assumed that pyramid schemes were illegal not to protect the stupid, but because there was no simple way to tax the income that the few successful people receive from it.
posted by pazazygeek at 2:00 PM on November 28, 2005

Can I tack on a question I was seriously considering asking?

Why are some con tricks illegal?

I just read an example of a con in American Gods.
  • Guy A goes into a restaurant, says he unfortunately can't pay, and leaves his violin as security.
  • Guy B examines violin and declares it to be worth fifty grand, leaves his business card.
  • Guy A comes back to pay and restaurant guy, rather than giving him the other guy's card, buys worthless violin off him for five grand.
I guess it comes under something like "obtaining money on false pretences"? But there's no actual crime, except misleading the restaurant guy, who has himself intended to obtain money on false pretences.
posted by AmbroseChapel at 2:15 PM on November 28, 2005

Pyramid scams, by the way, can be devastating to small communities

Or even small countries.
posted by thanotopsis at 2:33 PM on November 28, 2005

Ambrose, I don't think the restuarant guy is intending to obtain money on false pretences. He's merely made an investment which he believes to be profitable. It's not illegal to buy something off of someone who doesn't know its true worth. Also, intending to obtain money on false pretences isn't the same as actually obtaining money on false pretences, so the restaurant guy in the clear in that regard as well.

I'm not sure of the specific reason why it's illegal, but imagine if it wasn't: it would be impossible to obtain good advice on spending your money, because everyone could conceivably be in league with a seller. Truth in advertising is regulated for the same reason, and disclosure laws also cover the same ground. Imagine how the scam would be if Guy B disclosed that he stood to benefit if the restaurant guy bought the violin.
posted by breath at 4:20 PM on November 28, 2005

(BTW, I love hearing about clever scams, loved American Gods because of all the scams contained therein.)
posted by breath at 4:21 PM on November 28, 2005

I guess it comes under something like "obtaining money on false pretences"? But there's no actual crime, except misleading the restaurant guy, who has himself intended to obtain money on false pretences.

It's the fact that A + B are working in collusion to deceive C that makes the transaction fraudulent.

And, while it may seem that C is intending to behave fraudulently against A as well, there is no legal obligation to inform a seller of the true worth of a thing being sold when making a purchase. Having said which, if C's attempt to purchase the item from A also involved active deception (no, that's not a real stradivarius, you can tell by the way it doesn't have his initials written in magic marker pen on the back), then possibly fraud would have been committed as well.

It's worth remembering, though, that the act of one crime doesn't negate the prosecutability of another. So, even if C had been attempting to purchase A's violin using fraudulent means, that doesn't mean A + B haven't committed fraud in deceiving C as to the true worth of the violin.
posted by planetthoughtful at 4:21 PM on November 28, 2005

Vanoakenfeld: Don't listen to the worrywarts. I have a foolproof method of making money that only requires an outlay of $10, which you can send to me (email for contact info), which is much less than the outlay for 200 envelopes and postage.

(Prepares instructions for Vanoakenfeld for asking strangers for money on the internet).


(Or, in other words, perhaps those who disagree with laws to protect them from their own stupidity are proving the utility of said laws).
posted by klangklangston at 11:21 AM on November 29, 2005

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