Burnlounge Scam

52,099 checks totaling almost $1.9 million have been sent to victims who lost money to the BurnLounge scam which was selling opportunities to operate online digital music stores. – Source FTC

From 2005 to 2007, BurnLounge Inc., Juan Alexander Arnold, John Taylor, Rob DeBoer and Scott Elliott sold opportunities to operate on-line digital music stores.

Here is how the scam worked:

BurnLounge sold music, music-related merchandise, and packages of music-related merchandise. Customers could participate in BurnLounge in three ways: they could buy music and merchandise; they could buy a package to become an Independent Retailer with the ability to earn credits redeemable for music and merchandise; or they could buy a package and pay an additional fee to become a Mogul with the ability to earn credits redeemable for cash.

BurnLounge’s business had two primary aspects—its Retailer program and its Mogul program. Individuals could become Independent Retailers of online music by purchasing one of BurnLounge’s three packages: Basic ($29.95 per year); Exclusive ($129.95 per year plus $8 per month); or VIP ($429.95 per year plus $8 per month). Each package provided the Retailers with access to a ready made and customizable web page, called a “BurnPage.” A BurnPage was the vehicle through which Retailers sold music, music-related merchandise, or packages of music-related merchandise to customers in return for “BurnRewards.” More expensive packages included more merchandise for personal use by the Retailer. Individuals who participated as Retailers could redeem BurnRewards for music or merchandise.

BurnLounge Scam Website

Retailers could pay an additional monthly fee of $6.95 to become Moguls. Once qualified, Moguls could redeem BurnRewards for cash rather than music or merchandise.

BurnLounge’s bonus system was designed to be confusing. There was a 93.84% failure rate for all Moguls, meaning 93.84% of Moguls never recouped their investment. BurnLounge’s marketing focus was on recruiting new participants through the sale of packages. BurnLounge’s products had some value, but the products were not worth what was charged for them. Because purchasing a package was required for participation as a Retailer or Mogul, and because Moguls earned cash for selling packages, Moguls by default received compensation for recruiting others into the program. The majority of the BurnLounge business was the endless recruitment of moguls which created a pyramid scheme.

An important decision by the court in this case was the following:

The appeals court found that the legal test of a pyramid scheme does not require that the rewards be “completely” unrelated to the sale of products. The court noted that “[r]ecruiting was built into the compensation structure in that recruiting led to eligibility for cash rewards, and more recruiting led to higher rewards.” The court further stated that in this instance “the rewards for recruiting were ‘unrelated’ to sales to ultimate users because BurnLounge incentivized recruiting participants, not product sales.

– Source uscourts.gov

Retail product sales to customers need to be the focus of any business opportunity you are involved with. A warning sign of a pyramid scheme is endless recruitment of participants into a business opportunity where product sales are equal to being recruited into the scheme.