Yes. Penal Code section 327 makes it a crime to contrive, prepare, set up, propose, or operate an “endless chain.” The statute does not use the words “pyramid scheme.” It defines the offense by how participants are paid, and its elements do not include proof that any particular person relied on a lie or lost money.

What counts as an “endless chain”

Section 327 defines an endless chain as “any scheme for the disposal or distribution of property” in which “a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme,” or for the chance to be paid when someone the participant brought in introduces a new participant. In plain terms: you pay to get in, and what you are paying for is the chance to be paid for recruiting others, or for what your recruits recruit.

The statute excludes one kind of payment from “compensation”: “payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate.” Commissions on real sales to outside customers who are not buying their way in do not count. Payments for bringing in new participants, including payments based on purchases people make in order to join, do.

The charge and the penalty

Section 327 is punishable “by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or three years.” Because it can be punished either way, it is a wobbler, and the statute sets no dollar amount that separates the two. Under Penal Code section 17(b), a crime punishable either way becomes a misdemeanor for all purposes in listed situations, including when the prosecutor files a misdemeanor complaint (unless the defendant objects), when the court declares it a misdemeanor in granting probation, or when the judgment imposes a punishment other than state prison or felony county jail.

How this differs from a false-pretenses theft charge

Theft by false pretenses requires proof that the property owner relied on a false representation or pretense in giving up the property; the jury instruction for that crime, CALCRIM No. 1804, makes reliance an element. Section 327 has no reliance or loss element. It describes the structure of the scheme and the person’s role in it, so a charge can be brought even if no participant says they were deceived.

The civil side: getting your money back

Separately from any criminal case, Civil Code section 1689.2 lets a participant in an endless chain scheme, as section 327 defines it, rescind the contract the scheme is based on. The participant “may recover all consideration paid pursuant to the scheme,” less any amounts paid or consideration provided to the participant under the scheme. If the participant sues and prevails, the court may, on motion, award reasonable attorney’s fees. The section does not require a criminal charge or conviction first.

What this means for you

  • Commissions on sales to outside customers who are not buying their way in are not the “compensation” the statute targets. Paying to join for the chance to be paid for recruiting is.
  • You do not need to have personally misled anyone for a pay-to-recruit structure to be charged under section 327.
  • If you paid to join a scheme like this, section 1689.2 may let you recover what you paid in, less what you received from it.
  • Keep the compensation plan, sign-up materials, and payment records you already have. They show how the money actually moved, which is what the definition turns on.

Talk to a lawyer about your specific scheme

Whether a recruitment-based business crosses into an illegal endless chain depends on exactly how compensation works, not just on how the business describes itself. For other fraud-related charges, see white collar crimes. The Law Offices of David S. Chesley can review the actual structure of the scheme with you. Call (800) 755-5174.