Securities Law Section

Message from the Chair

Section Chair: 

Charles Niemeier
Williams & Connolly LLP
Washington, D.C.

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The Federal Bar Association - Securities Law Section is a proud sponsor of the virtual museum and archive of the history of financial regulation at While the museum is free and accessible to everyone at all times, the Section will highlight specific material and information within the museum on securities law issues in the coming months, providing current and prospective Section members with unique insight and context.

The maxim still rings true: “a fool and his gold are soon parted.” But do they have to be? In 1974, Former SEC Commissioner A.A. Sommer, Jr. posed this question in an address to the North American Securities Administrators. “Every year new and appealing means are found to part people from their money always with assured benefits to the promoter,” Sommer noted, pointing in particular to pyramid schemes disguised as multi-level marketing companies (MLMCs).

The scenario involved a new recruit making an initial investment to begin on the lowest level of the pyramid. As recruits signed up additional prospects, they reached the next level of the pyramid, and so on. In many cases, there was no marketable product; participants were rewarded on how many people they brought into the scheme. The differences between a genuine MLMC and a pyramid scheme included: required “buy-in,” a “get rich quick” premise, passive income gained for minimal work (particularly recruiting others), and minimal financial disclosure.

The topic was still hot for Sommer and his audience because, only three years earlier, the SEC had figuratively laid down the law on “pyramid sales plans.” In a 1971 Interpretive Release, the Commission confirmed that the agreement between operators of a pyramid scheme and its participants amounted to an “investment contract” within the meaning of the 1933 Act and that distributors of those securities qualified as brokers under the 1934 Act.

Nearly fifty years on, pyramid schemes continue to appear, and the Commission’s Interpretive Release still stands. The rise of social media, in particular, has made it easier than ever for dishonest promoters to snare the unsuspecting in their pyramid schemes. After shutting down two such schemes in the early 2010s, the SEC issued an “Investor Alert” on the subject in October 2013. But people remain tempted, and pyramids still emerge. The SEC recently settled with two fraudsters running a pyramid in Southern California. The pair promised that investors would receive “points” that could yield a certain rate of return and be used to buy products. The SEC found that the points were actually worthless and fined the duo $1.4 million in disgorgement plus $160,000 each in penalties.

One of the enduring problems has been the difficulty of telling a pyramid scheme from a genuine multi-level marketing business. The 2013 investor alert listed the same criteria noted in the 1971 Interpretive Release, but then, as now, the promise of something for nothing too often clouds the public’s judgment. In 1974, Sommer was resigned to the fact that fools and their gold would continue to be parted, but noted that regulators could “perhaps take consolation in the fact that probably without our efforts the numbers of these unfortunates would be greater and the losses to the nation more.”


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