The Securities and Exchange Commission brought charges against James Evans for engaging in a “Ponzi scheme.” The names of his scheme caught my eye: Cash Flow Bot and Dollar Monster. After digging around, I was puzzled as to what to call the scheme.
A Ponzi scheme purports to be a real investment opportunity, but payouts come from new investor money instead of the returns of the underlying investment (if any). The scheme’s sponsor needs some cover of respectability to convince his prey that he or she is really investing the money and generating returns.
How could an investor think that something called “Dollar Monster” was a real investment?
The websites are gone, but I found this 2010 description of DollarMonster:
DollarMonster is a simple straight-line matrix which is simply a one level payment system. The person at the top gets paid and the entire list below moves up every time 2 purchases in this line are bought.
Pyramid schemes promise consumers (or investors) large profits based primarily on recruiting others to join the program. The scheme is not based on profits from any real investment or real sale of goods to the public. The participant makes money by hoping he or she is near the beginning of the line and many more people come after.
Then I discovered this world of money cyclers. Dollar Monster looks like one of those. You put in a dollar. Two more people behind you put in a dollar, so you get their dollars, and they get paid when four more people put in a dollar. It’s impossible to sustain. By level 11 you need the number or participants to be in excess of the US population. What happens is the money keeps being recycled, crediting each others accounts, then implodes when more people cash out than new recruits join.
I don’t think it’s securities fraud. That may put money cyclers outside the grasp of the SEC. There is no investment contract. There is no pretense that you’re buying equity or debt. You’re just hoping that more people get in line behind you. It’s a game of chicken, keeping your money in and hoping to redeem before the inevitable collapse.
It looks like Dollar Monster went through several iterations over the years. In late 2013 Dollar Monster made the mistake of putting on a cloak of actual investment. That put DollarMonster into the SEC’s scope. According to the SEC complaint, DollarMonster stated its mission was to “provide our investors with a great opportunity for their funds -by investing as prudently as possible – to gain high rates in return.”
Money cyclers are easy to find and don’t pretend to be anything else. Look at the lists here:
None are legitimate ways to make money. It’s largely a gamble that you get in line early enough and can redeem your gain before everyone else. Collapse in inevitable. In the United States, money cyclers fall in a grey area of legality. As long as the platform does not misrepresent itself or make false promises, it may not be illegal.
Dollar Monster made the mistake of misrepresenting itself, making it look like a Ponzi scheme. That makes it securities fraud instead of merely being a sucker’s game.
Sources:
- SEC Charges Georgia Resident with Engaging in a Ponzi Scheme
- SEC Complaint against James Evan, CashFlowBot and DollarMonster
- Pyramid Schemes by Debra A. Valentine, Former General Counsel of the Federal Trade Commission
- SEC Shuts Down $600 Million Online Pyramid and Ponzi Scheme (ZeekRewards)
