Reports of gift club cropping up again

By Dan Daly, Journal Staff Writer | Saturday, July 10, 2004

Previous Page

Share

• del.icio.us
• Digg
• NewsVine
• Fark

Print

Email

The "gifting club" scam is apparently back in South Dakota, according to state Attorney General Larry Long. And it's still illegal, he said.

"Many involved in the clubs are ... targeting their friends, neighbors and relatives with claims that a $2,000 gift will quickly become a $16,000 reward," Long said.

It is the same type of gifting club pyramid scheme that swept through Rapid City, Watertown, Sioux Falls and other cities in 2000.

In the Rapid City case, 34 people - including business owners and government officials - were prosecuted for their role in the scam. Most pleaded guilty or no contest to charges of deceptive trade practices. Several people lost their jobs.

This time, Long said, there have been some reports of the scam in the Black Hills, but most of the gifting club activity seems to be in the Pierre area.

"The stuff coming across our desk indicates that it's right here in River City," Long said Friday in a telephone interview from Pierre.

No one has been charged or cited for recent gifting club activity, and Long said he couldn't comment on whether a criminal investigation is under way.

The Attorney General's Office sent out a warning to would-be participants that gift club pyramid schemes are illegal. "We're trying to put a lid on it before it gets rampant like it did the last time," Long said.

A gifting club - which can go by a number of names - is a classic pyramid: You have to put your money in the pool and recruit new contributors to keep it going. The new recruits put their money in - and go out to find more folks. Meanwhile, the players higher in the chain start gobbling up the money in the pool.

To keep going, the number of players expands quickly. If you are in a pyramid that requires each player at each level to bring in four newcomers, the number of new recruits below you goes from 4 to 16 to 64 to 256 to 1,024 to 4,096 to 16,384 - in only seven steps.

So, if you are one of 16,384 people in Pierre trying to find four new recruits, what are you chances of keeping it going? Inevitably, the pyramid collapses, and the latecomers lose their money.

Long said the 2000 gifting club craze involved more than $1 million in South Dakota before it caved in.

Pennington County State's Attorney Glenn Brenner, who prosecuted many of the Rapid City gifting club cases from 2000, said he has not heard of any new clubs here.

"I think it's pretty well known, based on our prosecution last time, that it's illegal. ... I doubt there would be any clubs here," he said.

The Lawrence County State's Attorney's Office also said it has not received any reports of pyramid schemes.

Long said pyramid schemes seem to be cyclical. Every few years, the scams return with new names and new structures that make them seem different from past scams. Sometimes, they are touted as fund-raisers for a good cause or an empowerment program to help people help themselves.

Sometimes, they are nominally attached to a product line and touted as a multilevel marketing program similar to legitimate programs such as Amway.

But if the program relies on new investors, not product buyers, then it's a pyramid scam, Long said.

Eight years ago, a multilevel program involving vitamins and health products attracted about 3,000 South Dakotans. At the time, it seemed as if everyone in Rapid City was either recruiting or being recruited to join the program. It eventually collapsed under the weight of regulatory pressure, bad press and its own inertia.

Contact Daly at 394-8421 or dan.daly@rapidcityjournal.com