Lyoness: a crumbling pyramid

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The Egyptian pyramids have always had something mystical about them. People have had difficulties explaining how exactly they were built, yet they persisted longer than most buildings in the world and most of them are in fact still there. One might expect this metaphor to be perfectly suited for a viable business opportunity. It may have a complex nature, people might have a hard time to explain how exactly it was built, yet it will turn out to be a persisting, overwhelming success that will stand the test of time.

Unfortunately, particularly for people who bought into it, this has never been the case so far. Pyramid schemes have always failed and will always fail, as this is inherent to their nature. A business model which relies (nearly) solely on investments made by new participants, or new investments made by existing participants, is inherently unsustainable for two reasons: a) at some point, one will run out of people willing to invest and b) eventually, the majority of the existing participants will be out of money.

The unravelling of a pyramid scheme can be triggered by many, many causes. First of all, like nearly any financial construction, it is a model that relies on trust. People need to trust the founders of the scheme with their money (and hand it over), and they have to keep trusting them in order not demand their money back. Much like in case of a bank run, a disappearance of (or even a decrease in) trust is fatal. As soon as participants start to demand their money back (and/or new people refuse to join), the pyramid will collapse. That is because the pyramid can and will never contain enough money to pay everyone back, especially not with the promised return rates.

Along the same line lays the second trigger: bad press can have fatal consequences for a pyramid scheme too. This bad press can be caused by people (particularly experts and/or authorities) looking into the scheme's deceiving business model, or by participants openly complaining about the pyramid fraud. A third reason for collapse is provided by authorities closing down a pyramid scheme, or even just investigating and/or prosecuting it. This trigger is strongly correlated with the first two triggers, as bad press can both cause and be caused by authorities starting an investigation. This bad press can also lead to a decrease in trust and vice versa.

The fourth reason is the limited amount of people in the world. Any scheme operated is inherently finite, meaning that it will have to end at some point. In theory, this would mean that as soon as the entire world population is enrolled, and has transferred all of its assets into the pyramid scheme, it would eventually collapse. However, in practice this happens much earlier, when the market becomes saturated (i.e. no-one is willing to join anymore; and/or no-one is prepared to invest more in the scheme). This process can be speeded up by the first three triggers, as they might convince doubting prospects not to join the pyramid scheme or keep existing investors from investing more.

The instigators of pyramid schemes have inherently bad intentions - they want to make money from the losses of others. In order to do so, they are willing to lie to - and deceive their prospects. In most cases, they offer their prospects the dream of greath wealth. Additionally, pyramid schemes are nearly always masked as something else, for example 'a good investment opportunity' or 'an income opportunity', to deceive the prospects and to obstruct early investigations by the media and authorities. In the early stages of a developing pyramid scheme, the people that hear about the 'opportunity' are roughly divided into two groups. A group of people is persuaded to give it a try, whereas the other group is sceptic and warns the other group not to join.

This is usually the first sign of a crumbling pyramid. While looking at threads on the particular 'company' on public forums, one will see two clearly defined groups: the opponents and the promoters (in line with how the instigators of the 'company' have defined it towards their adherents). Unfortunately, at that stage, the arguments brought forward by the opponents rely mostly on common sense (as no extensive media coverage is available yet), making it easier for the promoters to fight off the allegations and to persuade new people to join. The promoters have a toolbox (designed for them by the instigators of the scam) full of tricks to fool casual observers and persuade anyone who fails to see the full picture to join the scheme.

While Lyoness was received with some scepticism in Austria, this did not prevent a considerable amount of people from joining. Then, as the pyramid started to grow bigger, Freidl decided to postpone the inevitable downfall of his pyramid by using his stolen money to expand to new countries, and increase the market for his illegitimate product. Although this does not change the faith of a pyramid scheme, it can significantly prolong its existence.

At that point in the pyramid story, media start to pick up on the phenomenon, usually through the afore-mentioned public forums. It starts off with some cautious blog posts, warning the public to be careful while doing business with this company. Then, if the pyramid is big enough, some local and national newspapers start picking up on the story. In the mean time, the pyramid rapidly expands to new countries, sucks in a group of participants and moves on. In this way, the news always comes at least one country too late.

When a significant amount of countries has been sucked in to the pyramid, the company starts experiencing severe criticism in the host-country (or host-countries in case of Lyoness). The claimed approval of major corporations starts to crack (2; 3), a little more becomes known about the past of the instigators, some dissatisfied participants start demanding their money back and finally, the authorities also start investigations and law suits.

Then there is the time that elapses while the population of the host-countries (and anyone who speaks the language and follows the developments) become more and more aware of the scam that has been performed. Yet, in other countries, where the pyramid is still growing and actively promoted, most of the citizens remain unaware of these developments, due to unawareness, disinterest, ignorance or language-barriers. In case of Lyoness, several revealing articles were published (e.g.), crushing the business model and recruitment techniques and specifying the interest of authorities in prosecuting the company (1; 2; 3).

Currently, Lyoness is in the last part of this stage and the criticism starts to reach unbareable heights. More and more victims start to gather (2), experts and authorities start to warn explicitly (1; 2), the amount of authorities involved in investigating the company rapidly increases (1; 2; 3; 4) and more and more facts surface, also on public television (1; 2; 3; 4). Foreign media and authorities also start waking up and investigate the Lyoness swindle, for instance in Hungary, but also in Australia (where the Australian Competition and Consumer Commission has received sufficient complaints to start an investigation).





To more and more people it becomes obvious that Lyoness is going to collapse. The only question remaining is how this is going to happen. Although it could be triggered by a sudden decline in the trust the participants have in Freidl and his accomplices, this is unlikely as the investments are tied up in the system. Therefore, participants demanding their money will probably only lead to bad press, not to a sudden loss of liquidity as in a bank run. However, with the authorities closing in on Lyoness, Freidl might want to pull the plug himself and move somewhere warm and far from Graz. His former rackets (GTS and Galvagin) have resulted in liquidations, leaving the victims with nothing but a bunch of empty promises. It has been reported by the journalists of the Austrian public television show 'ORF Report' that Freidl is currently celebrating his birthday in the Maldives. For as far as can be determined, Austria has no extradition treaty with the Maldives. Possibly, Freidl is looking for his next corporate headquarters.

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