Age-old pyramid schemes were promoted by word-of-mouth and on telephone pole flyers. Now they flash around the world through mass e-mailings. "It's what we call "old wine in new bottles,' " a Federal Trade Commission official says.
By KRIS HUNDLEY
Published April 12, 2004
Jerry Hess, a 47-year-old father of two in Orange County, Calif., was surfing the Internet in November when he came upon what seemed an interesting business proposition.
For $3,500, he could have access to an automated data marketing system of 35-million leads, offering "a direct sale to infinity."
Clicking on a slick video presentation, he was wowed by promises of access to a targeted database that would propel him, like "rocket fuel," to phenomenal wealth.
Hess, an unemployed salesman, didn't have any particular product to market, but that didn't matter. The online pitch made it clear Hess could sell the marketing program itself and get rich through recruiting.
"I was e-mail marketing illiterate," Hess said. "But going into it, I said, "Boy, junk mail is legal, telemarketing is legal. All they can tell you is don't come back.' "
In fact, Hess ended up making a $5,000 investment that resulted in zero return. The program's twice-daily "Tim and Tony" training calls, where company executives Tim Rowland and Tony Lampert pitched new products and pumped up the sales force, came to a temporary halt. And the sponsor of the multilevel marketing program, JDO Media of Ocala, has been sued by Microsoft Corp. as one of the nation's leading spammers.
"I spent three months sending out at least 35-million e-mails based on the names they provided," Hess said. "And I did not get a single phone call inquiring. I've been totally duped."
Hess was not alone in succumbing to the pitch. An estimated 2,000 people, paying from $1,500 to $3,500, signed up for JDO's marketing program during just five months ending in March. The multilevel marketing program was known as Freedomwaverunner in November when Hess joined and 1UpAutomated by March. Last week, it was relaunched as Digital Response Solutions.
Under any name, consumer protection experts view spam such as JDO Media's as a classic pyramid scheme, in which participants try to make money solely by recruiting new participants. Before the Internet, such get-rich-quick schemes were promoted word-of-mouth and on telephone pole flyers. Now they're being advertised worldwide at hyperspeed.
"It's what we call "old wine in new bottles,' " said James Kohm, acting associate director of the Federal Trade Commission. There was an explosion of such schemes on the Internet in the late 1990s, he said, with the new technology seemingly custom-made for the scam.
"A pyramid scheme needs to reach a lot of people cheaply, and the Internet provides that opportunity," he said. "And, at least until the bubble burst, anything on the Internet seemed to make huge amounts of money, which made pyramid scheme claims more plausible."
One more advantage to the Internet: It created potential new products, such as e-mail databases, that made it easier than ever for pyramid schemers to disguise the true nature of their operation by appearing to offer a legitimate product.
"In a pyramid, the product is a fig leaf," said Kohm, who declined to comment specifically on JDO Media's operations. "And you don't want to spend money on a fig leaf."
John McLeod, the owner of JDO Media, did not return a call to his Ocala home seeking comment on 1UpAutomated and its affiliated programs.
Saundra Jackson, who sells ads about Internet golf games from her home outside Washington, D.C., joined 1UpAutomated in February. Jackson, a 52-year-old former AT&T employee, said a friend paid her $2,125 membership fee and she recruited another person to the program, only to have it fall apart within a month.
"Some very innocent people got caught up," said Jackson, who sold no ads through the millions of sales leads promised by 1UpAutomated. "But the people on top will always get their money."
Joan Smith, a former nurse and real estate saleswoman from Fort Myers, was recruited into the program in mid January, paying $2,125 only to discover the company was in chaos.
"Tim and Tony were just excellent salespeople," Smith, 64, said. "But as soon as I went on the first members' call, I knew there were problems. The (promotional) movie was down, the site was down, the database didn't work. I've gotten zero out of it."
When most people think of spam, they might think of those annoying unsolicited ads that clog the electronic inbox, offering penis enlargement, pornography or pills.
According to people who bought into JDO Media's program, its spam revolved around the "3-Minute Movie," an animated clip promising quick riches through a familiar scheme: You buy into the program, and your first recruit's money goes to your recruiter, but most of the money from your second recruit - and all the recruits after - goes to you. A portion of the recruiting fee, $650 according to some participants, went to JDO Media.
"The guy who brought me on said he had 11 paylines and he wished he had stopped at five," Hess said of Richard Gade, who lives in Scottsdale, Ariz. "But I don't think he was telling the truth."
Gade, who has left 1UpAutomated and started a new marketing program, TheCashXplosion, said he did well with JDO Media's program, but had to move on.
"They were getting attacked a lot and that was creating a lot of havoc," Gade said of 1UpAutomated. "So after the new (spam) compliance laws came in (on Jan. 1), I went out and got my own address. I've never done anything illicit on the Internet."
From Gade's perspective, Microsoft's lawsuit against JDO Media is nothing more than a case of a giant bully unfairly trying to keep the small guy from making a buck.
"They want to control all Internet marketing and normal people can't afford to pay their extreme costs," he said. "They don't want normal people out here to be able to generate any cash flow."
Gade said JDO Media's operation was not spam because people in its database had opted to receive unsolicited e-mails.
"These were opportunity seekers who had "opted in' to receive information about home-based businesses," he said. "I don't mind not sending e-mails to people who aren't interested. I want them to get out of my way."
But for a legitimate company, 1UpAutomated went to unusual lengths to do business. As Hess and other members learned, the entry fee was just the beginning.
To send e-mails, members were supposed to pay to use the company's software designed to bypass the members' Internet service provider. Jackson, the golf-game marketer, said she was told it would cost $50 a month to send 500,000 e-mails via 1UpMarketing's software. She said she declined and sent the e-mails out directly. "My e-mails are from me," she said.
Hess said Gade described Send-Safe, one of the software products used by JDO Media, as "a proxy mailer based in Russia."
By using a proxy, often the hijacked computer server of an uninvolved third party, the company could disguise the true sender of the e-mail messages.
"Tim and Tony even made reference on one call to the fact you'd use proxies because your ISP would get mad at you if you tried to send out that quantity of e-mails," Hess said. "But after January, they changed their song and dance and said they weren't using proxies."
Smith from Fort Myers said they told her to send out bulk e-mails through a guy who supposedly ran his operations from Israel.
The Microsoft lawsuit alleges that JDO Media routed its e-mails through open proxies in violation of antispam laws. Send-Safe, one of the programs Hess and others said was used by 1UpAutomated, is listed among the world's top 200 spam operations by SpamHaus, an antispam group in London.
Despite using 1UpMarketing's software and even buying additional "double opt-in" leads, at $2 each, Hess of California came up with little more than a credit card debt.
"What were supposedly the best leads on earth turned out to be a fraud," he said. "The names were incorrect, the phone numbers were like "9999.' When I complained, I was told they were looking into the situation. Then they billed my credit card for $200."
Hess said he thinks 1UpAutomated, which went through several name changes, kept recycling and reselling the same names to its members.
"A person might opt out of one program, but they hadn't yet opted out of the new program," he said. "It was a real loophole."
Hess is now interviewing for more traditional sales jobs. He said he has been invited to join Gade in TheCashXplosion, but has declined.
Gade, whose new company has not been named in any antispam lawsuits, defended TheCashXplosion. On its Web site, the company describes itself as a networking marketing company, not a pyramid scheme.
"We're not doing anything that's not compliant," Gade said. "I've never found a group of people who work so hard to help other people."
Smith of Fort Myers said she paid Gade $100 to join the new group, which is not yet operational.
"I'm hoping I can connect with something totally legitimate so I can get the big Kahuna," said Smith, who is trying to buy a home for her disabled daughter. "I have a lot of financial pressure on me. I'm looking for the gold."
She remains optimistic despite the odds.
"I have tried multilevel marketing as far back as the 1970s, but I've never made any money on it," she said. "But if everybody did what they agreed to do, I would be very wealthy."
Jackson, who was recently invited to join a multilevel marketing group called Leadstampede for $20,000, said she's learned her lesson.
"If a snake bit you, you don't go back to the snake," Jackson said.
