Discerning network marketing businesses from scams
By Carole Moore • Bankrate.com

Incentive is a mighty motivator in the world of network, matrix or multilevel marketing, often known as "MLM." You need cash to pay off bills, or perhaps you want to taste the good life. Television ads showcase killer incomes from at-home businesses and you think, "Why not me?"

The truth is the vast majority of those who sign on the dotted line don't end up with a huge bottom line. In fact, some who answer the siren's call of quick money find they've landed in a scam.

Network marketing can be complicated in structure, but the basic concept is simple: Greater numbers mean more money. By bringing people into the sales force or investment plan, profits or investments increase and, since money flows upward in networking, the higher a person is in the network, the more money he or she will theoretically make.

But the real question is: "Can you make money with an MLM?" Yes -- but that's a qualified answer, since not all network marketing is created equal. Before you start pricing that Porsche or South Beach mansion, be sure to bone up on what people inside and outside of the industry say.

Multilevel marketing firms: legitimate businesses or scams?

• Illegal pyramid schemes • A recent Ponzi scheme • Inside an MLM sting operation • Distinguishing legitimate MLMs • College students a prime target • Consumer watchdogs • Network marketing checklist

Illegal pyramid schemes
Network marketing has its own unique language and the terms sometimes read like Swahili. To make a profit, the network must continually expand.

Networks can be both legal and illegal. The most famous illegal network marketing comes in the form of pyramid or "Ponzi" schemes (so named after an Italian immigrant who operated U.S.-based scams in the early 1900s). Pyramids evolve like they sound -- in the shape of a pharaoh's tomb. And they don't sell an actual product. Here's how a typical pyramid works:

John hypes a surefire investment he says will go through the roof. He predicts profits as high as 40 percent and starts collecting money from people eager to get in on the action. John then urges those who've already invested to spread the word and bring in their friends, family and business associates.

In some cases, the guy at the top (in this example, John) keeps the scheme alive by using money from new "investors" to pay returns to older investors. Pyramid schemes need continuous infusions of new money, courtesy of constant recruiting. As more enter the fold, the base of the pyramid expands.

Since there's no real investment to begin with, the pyramid eventually collapses and those running the scam boogie with the money -- or, if they're caught, end up in court.

A recent Ponzi scheme
James Lewis appeared to be a successful money manager. He lived well, traveled frequently and bought expensive cars. But the 60-year-old Orange County, Calif., man wasn't the visionary investor his many victims perceived him to be. Instead, he was a cheat and a fraud.

Lewis, who was sentenced in May to 30 years in prison on charges of money laundering and mail fraud, is believed to have swindled $311 million from private retirement savings in one of the country's longest-running pyramid schemes. Although the government hopes to recover a small percentage of the stolen funds, it is far more likely that most of the victims will simply be out luck, as well as cash.

Inside an MLM sting operation
Katherine Lewis, a public relations executive who lives in San Diego, has seen the seamier side of multilevel marketing from the inside.

Before entering the PR field, Lewis was hired as an administrative assistant for a Web-based network marketer. She says part of her job was to handle irate callers.