Matrix scheme: Difference between revisions

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{{Short description|Type of financial fraud}}

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{{EngvarB|date=January 2014}}

{{Use dmy dates|date=January 2014}}

A '''matrix scheme''' (also known as a '''matrix sale''' or '''site''', and as a '''hellevator''', '''excavator''' or '''ladder scheme''') is a [[business model]] involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of greater value than the amount given.<ref name=oftpress>{{cite web|url=http://www.oft.gov.uk/news/press/2005/161-05 |title=Matrix Website Scheme stopped by Office of Fair Trading |access-date=5 August 2006 |url-status=dead |archive-url=https://web.archive.org/web/20070314233701/http://www.oft.gov.uk/news/press/2005/161-05 |archive-date=14 March 2007 }}</ref> Matrix schemes are also sometimes considered similar to [[Ponzi scheme|Ponzi]] or [[Pyramid scheme|pyramid]] schemes.<ref name =msn1>{{cite web | url = http://www.nbcnews.com/id/3078957 | archive-url = https://web.archive.org/web/20140106134324/http://www.nbcnews.com/id/3078957 | url-status = dead | archive-date = 6 January 2014 | title=$150 plasma TV site faces lawsuit | website = [[NBC News]] | access-date=5 August 2006}}</ref> They have been called "unsustainable" by the United Kingdom's [[Office of Fair Trading]].<ref name =oftpress/> A matrix scheme is also an example of an 'exploding queue' in [[queueing theory]].

==History==

A '''matrix scheme''' is a [[business model]] involving the exchange of money for goods with a side bonus of being added to a waiting list for a product. Once a list receives enough new members, the person at the top of the list receives the product, and the next person in the list moves up. Matrix schemes are heavily promoted across the [[Internet]], especially on sites such as [[eBay]] and [[craigslist]].

The first known matrix scheme is widely believed to be EZExpo.com, which started the popularity of matrix schemes in 2002.<ref name =msn1/> By 2003 more than 200 matrix schemes were in operation, including one which had the same owner as the payment processor [[StormPay]] (TymGlobal). Subsequently, both TymGlobal and StormPay were accused of running an illegal Ponzi scheme.<ref name = leaf>{{cite web | url = https://pixyrs.com/mlm-software-development.php| archive-url = https://web.archive.org/web/20180210194900/http://www.pixyrs.com/mlm-software-development.php| url-status = dead| archive-date = 10 February 2018| title = mlm business | access-date = 10 August 2006}}</ref> StormPay later claimed to be independent of TymGlobal, and they stopped accepting matrix schemes as customers. Although many have since ceased trading, some schemes are still known to be operating worldwide. The payment processor, StormPay, is no longer trading.

==Operation==

{{Section citations needed|date=July 2023}}

The operation of matrix schemes varies. To move upward in the list, the person must wait for new members to join, or refer a certain number of people to the list. The rewards for those at the top of the matrix list are usually high-demand consumer electronics, such as portable [[digital audio player]]s, plasma and high-definition [[television]] sets, laptop [[computers]], and [[cellular phone]]s. More people joining a list improve the likelihood of people near the top receiving the product, but the large number of newcomers decreases the likelihood that sufficient quantities of new people will join the list to assure all the more numerous recent joiners will reach the top. Since mathematically this process cannot continue, eventually the matrix must reach a point by which it will be nearly impossible for new people added to the list to reach the top. Supporters claim that additional revenue streams from advertising are used to keep the lists moving. There are other methods for keeping the lists moving, and each scheme employs different techniques.

The operation of matrix schemes varies, though they often operate similarly to pyramid or Ponzi schemes.<ref name="msn2">{{cite web | url = https://www.nbcnews.com/id/wbna3078976 | title=$150 for a plasma TV? A bad bet | website=[[NBC News]] | date=28 January 2003 | access-date=5 August 2006}}</ref> Some of the former participants of these schemes consider them to be a form of [[confidence trick]], although others are happy with their purchase.

To move upward in the list, a person must wait for new members to join or refer a certain number of people to the list. This is accomplished through purchasing a token product of marginal value: usually e-books, cell phone boosters, screen savers, or other software CDs/DVDs. When a pre-defined number of people have purchased the token product, the person currently at the top of the list receives their reward item, and the next person in the list moves to the top. The rewards for those at the top of the matrix list are usually high-demand consumer electronics, such as portable digital audio players, high-definition television sets, [[laptop]]s, and cellphones. Reaching the point on the list where one receives the expensive goods is termed "cycling".

However, without sufficient alternate streams of revenue, the process cannot work. If a list requires a mere 4 people to cycle 1, that means only 20% of the list can ever cycle without alternate revenue streams, however large the list gets. If the entire world were to join the list, 80% of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.

In many cases, the token product alone could not be reasonably sold for the price listed, and as such legal experts claim that, regardless of what is said, the real product being sold is the "reward" in question in those situations. In these cases, the operator could be charged with running a gambling game or failing to supply ordered products. Steven A. Richards, a lawyer who represents [[multi-level marketing|multi-level marketing (MLM)]] companies for Grimes & Reese in Idaho Falls, Idaho, has stated that often there are no clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn't buy it without the attached gift, the scheme probably runs afoul of federal and state laws.<ref name = msn2/>

Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 50 people are required before it will cycle, the first person to join only needs 50 sign ups, but the second person needs 99, 49 more for the person above him, and then 50 more for himself. The third person on the list likewise needs 148 more signups, 48 for the person on top of the list, 50 for the person directly above him, and then 50 for himself. And then number of people required continues to grow for each new person joining the list. Unless the matrix site in question has a means by which to "auto-cycle" members (such as diverting alternate streams of revenue into the lists), the lists will stagnate.

The "Matrix List" by which the sites receive their name would be what is known as a straight-line matrix, or one-by-X matrix. This is similar to many MLMs that use Y-by-X matrices to fill a down-line.

Unlike a [[pyramid scheme]], a side product is delivered to each newcomer in the course of the enrollment purchase. Most matrix scheme owners sell electronic books or software CD-ROMs as the product, and then add the purchaser to the product list as a "bonus." In certain cases, the product alone could not be reasonably sold for the price listed, and so legal experts claim that regardless of what is said, the real product being sold is the "bonus" in question in those situations. Steven A. Richards in particular, a lawyer dealing with these issues, states that if the item in question isn't actually worth the amount of money tendered for it, and most people would not make the purchase if not for the bonus in question, it's probably illegal. [http://msnbc.msn.com/id/3078976 1].

For example, one situation may be a one-by-10 matrix for a video game console (a common reward). In such a matrix the site would usually sell an e-book for $50 to be placed on the list. After nine additional people purchased a spot, the first person would receive either a video game console (or cash value equivalent) and would be removed from the list. The person who had been second would move up to the first spot and an additional 10 people would have to purchase spots in order for that person to receive a console. It is this orderly movement which has also given the name "elevator scheme" to these sites, as people move up the "elevator" (escalator, ladder) to the top at which they would then "cycle" out of the matrix.

==Legality==

HoweverIn such a matrix, without9 sufficientout alternateof streams10, or 90 percent, of revenueall customers will not receive the reward item, because the processrules cannotof work.the scheme Ifare athat listone requiresreward ais mereissued 4for peopleevery to10 cyclecustomers 1,that join. (The fact that meansthe onlyreward is issued to the customer at the 20%top of the list candoesn't everchange cyclethe withoutproportion alternateof rewards given to customers signed up.) Supporters claim that additional revenue streams, howeverfrom largeadvertising are used to keep the listlists getsmoving. However, detractors claim that it is impossible to generate enough outside revenue. If the entire world were to join the list, 80%90 percent of the world would be unable to cycle if the site did not draw sufficient alternate revenue streams. Adding more people to the list does not change the fact that the majority would receive nothing without these streams.

While detractors of matrix schemes contend that the sites and business models are illegal, in America there are no laws naming the schemes as illegal, and no rulings stating that the business model operates outside of law. There are, however, some challenges currently in the court system. In addition, the U.S. [[Federal Trade Commission]] and the U.K. [[Trading Standards]] have issued warnings to the public about the sites, stating that due to the ease by which these models can be manipulated for fraudulent purposes, care should be taken and research done on the scheme in question prior to purchasing from them with the intent on receiving the list gift. The rewards for entering into a successful matrix scheme are substantial. However, several matrix sites have shut down whilst defending lawsuits, such as the legal action taken against the grandfather of the matrix site, EZExpo.com. {{fact}}

Additionally, the amount of time needed before a given individual will receive the product in question is often mistaken. In a matrix in which 5010 people aremust requiredsign up before it will cyclecycling, the first person to join only needs 50nine signadditional sign-ups to cycle, but the second person needs 99,18 additional sign-ups: 49eight more for the person above himthem, and then 5010 more for himselfthemself. The third person on the list likewise needs 14827 moreadditional signups,: 48seven for the person on top of the list, 5010 for the person directly above himthem, and then 5010 for himselfthemself. And thenThe number of people required continues to grow for each new person joining the list. UnlessFor the matrix10th siteperson into question hascycle a meanstotal byof which100 topeople "auto-cycle"would membershave (suchto assign divertingup, alternate1000 streams of revenue intofor the lists)100th, theand listsso will stagnateon.

Through this process, the matrix scheme generates substantial profit for its organiser. At the time of its popularity, for example, a PlayStation 2 cost a maximum of $299. After selling 10 $50 e-books, the organiser could make $500, and could purchase a PS2 for $299 to send to the first bidder while retaining a $201 of capital in return. But the schemer must take in consideration the actual price of an e-book which could be around $10. Finally, the buyer would have a profit of $101 (=201-10×10) This same process could be repeated every time the matrix cycles; if the matrix cycled 10 times, the organiser would have sold $5000 worth of e-books, of which $2990 would have been spent on 10 PS2s, leaving them with a revenue of $2010, and a profit of $1010.

The U.K. Office of Fair Trading, however, has determined some of them to be illegal. On July 1st, 2005, the Office of Fair Trading in England declared that two matrix schemes were a form of illegal lottery, pulsematrix.com and phones4everyone (at themobilematrix.com). [http://www.oft.gov.uk/News/Press+releases/2005/118-05.htm] In the UK some matrix sites may claim that they declare themselves to be a private lottery, and thus operate legally. Other opponents of matrix schemes declare this not to be so.

==In queueing theory==

Lotteries and Amusements Act 1976 ("the Act")

3. Under the Act, which covers only Great Britain, all lotteries which do not constitute gaming are declared to be unlawful, unless they are:

(a) small lotteries incidental to an exempt entertainment;

(b) private lotteries;

(c) society lotteries;

(d) local authority lotteries;

or (e) part of the National Lottery. [http://66.102.9.104/search?q=cache:pXT2wd9F-6oJ:www.colchester.gov.uk/servedoc.asp%3Ffilename%3DPPlotteryinfo.pdf+The+Lotteries+and+Amusements+Act+1976+Section+4&hl=en&gl=uk&ct=clnk&cd=18]

A matrix scheme is easily represented as a simple M/M/1 queue within the context of [[queueing theory]]. In such a system there is a Markovian arrival, Markovian service, and one single server.<ref>F. S. Hiller and G. J. Lieberman. Introduction to Operations Research. McGraw-Hill, New York, 1995</ref> In the standard matrix queue, service rates are a function of arrival rates since the time to cycle out of the queue is based on the entry fee into the matrix from arriving members. Also, since members move through the matrix in single file, it is easy to associate the single server.

The rules for private lotteries are below:

A private lottery is one in which the sale of tickets is confined to either:

(a)members of one society established and conducted for purposes not connected with gaming, betting, or lotteries;

(b)persons all of whom either work or reside on the same premises.

(c)for persons all of whom work on the same premises.

The basic premise of [[queueing theory]] is that when arrival rates equal or exceed service rates, overall waiting time within the queue moves towards infinity.<ref>Hiller and Lieberman</ref>

Some matrix schemes operated through websites claim that they operate as a private lottery. Their reasoned arguements for this are shown below:

The basic formulation includes three formulae. The traffic intensity, ρ, is the average arrival rate (λ) divided by the average service rate (μ):

''The members are those people who have bought something at an internet website, such a software CD. The website constitutes the clubhouse, as this is where the members of the club meet. Straight after the purchase the members are placed into the lottery, which is advertised on the website (clubhouse). Tickets are not legally needed to be produced, but often they are sent as email confirmations. The monies raised from the sale of the tickets is split between prize fund and the club fund, usually with an 80% split in favour of the prize fund. '' [http://www.cyberama.info/index.htm]

<math>\rho = \lambda / \mu</math>

Others dispute this, pointing out that advertising outside of the club is not allowed. It is hard to prove either viewpoint as this arguement has not been tested either in a court, by the Office of Fair Trading or by the Department of Trade and Industry.

The mean number of customers in the system (N):

It is worth noting that there have been no cases in criminal courts. All court cases to date have been in the civil court system, and so it is still unclear whether matrix schemes operate within the law.

<math>N = \rho / (1 - \rho)</math>

==References==

*{{cite web|title=What is a Matrix|work=Matrix Watch|url=http://www.matrixwatch.org/modules.php?name=FAQ&myfaq=yes&id_cat=6&s=|accessdate=May 27|accessyear=2005}}

*{{cite web|title=How does a Matrix Site Work?|work=Matrix Watch|url=http://www.matrixwatch.org/modules.php?name=FAQ&myfaq=yes&id_cat=6&s=#28|accessdate=May 27|accessyear=2005}}

*{{cite web|title=Pyramid Schemes, Ponzi Schemes, and Other Frauds|work=|url=http://members.impulse.net/~thebob/Pyramid.html|accessdate=June 3|accessyear=2005}}

*{{cite web|title=Top ten scams to look out for|work=UK Office of Fair Trading|url=http://www.oft.gov.uk/News/Press+releases/2005/18-05.htm|accessdate=June 3|accessyear=2005}}

*{{cite web|title=Website schemes offering 'free' electronic gadgets stopped by OFT|work=UK Office of Fair Trading|url=http://www.oft.gov.uk/News/Press+releases/2005/118-05.htm|accessdate=July 1|accessyear=2005}}

*{{cite web|title=(Pt 1, Sect.4) Private Lotteries|work=The Gaming Board for Great Britain|url=http://www.gbgb.org.uk/lotlaw_main.html#PRIVATE_LOTTERIES|accessdate=July 5|accessyear=2005}}

*[http://www.oft.gov.uk/News/Press+releases/2005/161-05.htm Office of Fair Trading press release]

And the total waiting time within the queue (T):

==News articles==

*[http://msnbc.msn.com/id/3078976 $150 for a plasma TV? A bad bet] - [[MSNBC]]

<math>T = 1 / (\mu - \lambda )</math>

*[http://msnbc.msn.com/id/3078957 $150 plasma TV site faces lawsuit] - [[MSNBC]]

*[http://www.thisislondon.com/news/articles/11783353?source=Evening%20Standard Warning over iPod scam] - [[This is London]]

It is possible to see that as arrival rates rise towards service rates, the total waiting time (T) and mean number of customers in the system (N) will move towards infinity.<ref name =oftpress2>{{cite web | url=http://www.eventhelix.com/RealtimeMantra/CongestionControl/m_m_1_queue.htm

*[http://www.wired.com/news/culture/0,1284,62226,00.html eBay scam uses iPods as bait] - [[Wired magazine|Wired]]

| title=M/M/1 Queueing System| access-date = 3 March 2007}}</ref> Since service time can never exceed the arrival time in the standard matrix, and total waiting time can only be defined if service times exceed arrival times, the only way for the matrix queue to reach stability is for outside income sources to exceed those being entered into the system.

==Legality==

Currently there are no laws specifically naming matrix schemes illegal in the US. However, the US [[Federal Trade Commission]] has issued warnings to the public about these sites. Additionally, the US [[Federal Trade Commission]] and the UK [[Trading Standards]] have issued warnings to the public regarding the ease with which these models can be manipulated for fraudulent purposes. Many of the original matrix sites, including EZExpo.com, are no longer in operation; some of them closed down while defending civil lawsuits. In 2003 EZExpo and several payment processors were sued in the civil courts for running an illegal lottery in the state of California, with the payment processors abetting the scam.<ref>{{cite web | url =http://appellatecases.courtinfo.ca.gov/search/case/dockets.cfm?dist=0&doc_id=371626 | title = California Courts – Appellate Court Case Information -Docket Entries| access-date = 6 August 2005}}</ref><ref>{{cite web | url =http://wagelaw.typepad.com/wage_law/2006/05/prop_64_cases_t.html | title = Wage Law: Prop 64 Cases To Be Argued | access-date = 6 August 2005}}</ref><ref>{{cite web| url = http://www.diaz-law.com/diazlaw/2005/05/prop_64_to_the_.html| title = The Antitrust Monitor: Prop 64 to the Rescue for Neovi, PaySystems, and PayPal But Not for Ginix| access-date = 6 August 2005| url-status = dead| archive-url = https://web.archive.org/web/20070310050844/http://www.diaz-law.com/diazlaw/2005/05/prop_64_to_the_.html| archive-date = 10 March 2007| df = dmy-all}}</ref> However, the civil case is still ongoing. One result of the lawsuit is that those payment processors and some others no longer accept matrix schemes as customers. Currently, no legal precedent exists regarding the matrix scheme in the US.

In the UK, the Office of Fair Trading has declared some of them to be illegal. On 1 July 2005, two matrix sites, pulsematrix.com and phones4everyone (themobilematrix.com), were declared to be running a form of illegal lottery. These two sites promptly closed down as part of a settlement agreement with the Office of Fair Trading (OFT). Other similar matrix sites also used this decision to close down their sites. A few UK matrix sites carried on by utilising contractual law to trade legally, with one major site carrying on until May 2006 when it was sold to a company in Denmark. In the UK there is no specific law against matrix sites.

Other countries may have different laws regarding these matrix sites, but information is unavailable at this time.

==Notes==

{{reflist|colwidth=30em}}

==External links==

*[httphttps://msnbcwww.msnnbcnews.com/id/3078976wbna3078976 $150 for a plasma TV? A bad bet] -– [[MSNBC]]

*[http://www.matrixwatch.org Matrix Watch.org] - dedicated to stopping matrix sites.

*[https://web.archive.org/web/20081030000647/http://www.thisislondon.co.uk/news/article-11783353-details/Warning+over+iPod+scam/article.do Warning over iPod scam] – [[London Evening Standard#Websites|This is London]]

*[http://www.cyberama.info Cyberama.info owned by MatrixWatch Ltd] - A pro-matrix viewpoint.

*[httphttps://www.wired.com/news/culture/0,1284,62226,00.html eBay scam uses iPods as bait] -– [[Wired magazine|Wired]]

*[https://www.nbcnews.com/id/wbna3078976 MSNBC article]

{{Scams and confidence tricks}}

[[Category:Multi-levelPyramid marketingand Ponzi schemes]]