Chain Letters and Ponzi schemes

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My wife got a chain letter in the mail the other day from a friend. At first we weren't really sure if it was a chain letter or not. Nether of us had ever seen one before, but it sure did sound like one when reading it. Of course, the letter said "this is not chain letter," but we were a little skeptical of that claim.

That evening I found some websites online that described chain letters, and learned that chain letters violate federal law because they constitute an illegal lottery. This website has a good writeup on the topic: Regardless of what the author of the letter says, it violates Title 18, section 1302 of the United States Code, which makes it illegal to knowingly deposit in the mail any letter, package, postal card, or circular concerning any lottery, gift enterprise or similar scheme, offering prizes dependent in whole or in part upon lot or chance. It also violates Section 5 of the Federal Trade Commission Act, prohibiting misrepresentations in advertising even if the mails are not employed in operating the program.

I also learned that there are certain types of chain letters that are legal. If the chain letter does not involve money or any other item of value then it is not an illegal chain letter. Postcard chain letters, for example, are not illegal.

This chain letter was especially illegal because it not only sent an item of value, it sent a gambling instrument. This chain letter asks you to send a lottery scratch-it ticket through the mail, which violates postal service codes that prohibit the mailing of gambling instruments.

Another interesting aspect of this chain letter was the depth of the pyramid was really low. Most chain letter schemes I've read about have a list of 5-6 people on them, meaning the chain would need to go 5-6 levels deep before you saw a reward. This chain letter only listed 2 people. I suppose as chain letters go this was a pretty mild one. Or possibly it was just in the early stages and no one figured out yet to increase the depth of it.

That evening I also read about ponzi schemes, a system created where you convince people to make an investment in something and then you pay them off using money contributed by later investors, and so on and so forth until you've scraped enough money off the top that you can flee the country before the whole thing colaspes on you. Kind-of reminds you of a big government program that we all pay for in the form of a payroll deduction.... Social Security??

Dang, I wasn't the first person to think of that. The forth hit is a link to www.ssa.gov/history/ponzi.html, titled: "Is Social Security a Ponzi scheme?"

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This page contains a single entry by Robert W. Rose published on February 22, 2006 12:39 PM.

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