Pyramid schemes are one of the most well known of the white collar crimes, thanks to people like Bernie Madoff. Generally these schemes involve paying money into a system where a few at the top get lots of money while many new people are suckered into the scheme by others. The idea is to sell people on joining rather than on selling products to people. Pyramid or Ponzi schemes aren't legal in Tennessee.
On July 1, 2014 a new bill criminalizing pyramid promotional schemes came into effect in Tennessee. There were other laws on the books already, but this law strengthens Tennessee's ability to fight pyramid schemes.
Tennessee Pyramid or Ponzi Scheme Laws: Statutes
The main provisions of Tennessee's laws on pyramid schemes are outlined below.
Tennessee Code Sections 39-17-506: Lotteries, Chain Letters, and Pyramid Clubs, 47-18-104: Unfair Or Deceptive Acts Prohibited, and Title 47, Chapter 18, Part 56: Pyramid Promotional Schemes
What is Prohibited?
Tennessee prohibits several pyramid scheme related activities, including:
- Pyramid Promotional Schemes - Knowingly establishing, promoting, or operating a pyramid promotional scheme or an opportunity to receive compensation for introduction people to the plan rather than sales of goods or services
- Unfair or Deceptive Acts - including selling the right of participation in a "pyramid distributorship," defined as any sales plan where a person buys the opportunity to receive a benefit contingent not on the sale of goods or services, but on inducing others to join the same plan
- Unfair or Deceptive Prize Practices - A company can't require payment as a condition to receive or get information about a promotional prize or make the impression that payment is required, unless the person has received a notice with the following written prize information:
- Name and address of the company
- Retail value of each prize
- Odds of winning the prize
- Any conditions, like shipping and handling or other charges, including the amount to get the prize
- Any restrictions or limitations that apply to the prize or eligibility for the prize
- If a statement about being a winner or finalist is made, then the maximum number in this group must be given too
- Lotteries, Chain Letters, and Pyramid Clubs - Organizing or soliciting others to join any pyramid club where something of value is paid by a member to other member(s) of the club, with the goal to increase membership through a chain process (i.e. new members securing more new members) is considered "making or aiding in the making of any lottery" and is illegal.
A restraining order or injuction can be ordered by the court to stop bad acts. If a pyramid promotional scheme violation occurred, the court can impose an up to $10,000 civil penalty per violation per person. Funds collected from this will be deposited in the state's general fund. Unfair and deceptive practices can have a civil penalty of $1,000 to 10x the amount collected for each violation.
Additionally, a person who was harmed by a deceptive act or pyramid scheme can sue the perpetrator in civil court for their losses.
Creating, operating, or promoting a pyramid promotional scheme is a Class A misdemeanor. The criminal penalty for participating in a pyramid club or chain letter scam depends on the amount of money involved:
- If $50 or less, it's a Class C misdemeanor, punishable by up to 30 days in jail and a fine not more than $50
- If $50-250, it's a Class B misdemeanor, up to 6 months in jail and up to a $500 fine
- If $250-$10,000, it's a Class A misdemeanor, up to 11 months and 29 days in jail and up to a $2,500 fine
- If over $10,000, it's a Class E felony, 1-6 years in prison and up to a $3,000 fine
Depending on the type of pyramid scheme, the perpetrator(s) can be charged with various other crimes, including fraud, money laundering, securities fraud, and conspiracy both in Tennessee and possibly in federal court. These crimes can be penalized with prison time, fines, and restitution to victims.
Who Enforces these Laws?
The Tennessee Office of the Attorney General and Reporter enforces the prohibition of pyramid schemes in Tennessee. However, the federal Department of Justice may be involved in a pyramid scheme case, if the scheme involved areas outside of Tennessee. Local prosecutors may also go after pyramid scheme violators for crimes related to the fraud in their counties.
Where Can Victims Get Help?
If you're a victim of a pyramid scheme, report it to the Tennessee Department of Commerce & Insurance at 1-800-342-8385 or online. Learn more about pyramid scheme red flags to protect yourself from scams.
Where Can Accused Perpetrators Get Help?
If you’re charged with any pyramid scheme related crimes, you should quickly contact an experienced Tennessee criminal defense attorney.
Note: State laws change frequently -- it's important to verify the state laws that you're researching.