A Guide To Ponzi And Pyramid Schemes
  • October 21, 2020
  • brk_admin

Ponzi and pyramid schemes may seem like they are one and the same, but they are not. Granted, in both types of schemes, through new investor contributions, existing investors are compensated, there are definite differences between them.

With a pyramid scheme, by recruiting new participants, existing participants are earning money. The existing participants are aware of this.

However, with a Ponzi scheme, the belief is that from their investments, participants are earning returns.

Below, we are going to take a more detailed look at Ponzi schemes and pyramid schemes, how they differ, and give you some examples.

A Pyramid Scheme – What Is It?

A pyramid scheme, frequently appearing as a legitimate MLM (multi-level marketing) practice, may also be referred to as a chain referral scheme. Regardless, the business model is fraudulent. The recruitment of new members promises that if they enroll future members in the scheme, they will receive payments tied to enrollment. Eventually, however, the business becomes unsustainable because future recruiting becomes impossible.

Pyramid Scheme Examples

  • Give-and-take: For this fraudulent scheme, jail time was served by the individuals convicted of running it. The scheme involved a request of an entry fee being made by a group of operators. If entrants recruited new members of a certain amount, they were promised a bonus.
  • Burn lounge: A $17 million judgment was won by the FTC in this case. It involved luring people to an online music store. While victims recruited other participants into the "business", they earned awards. They were also expected to pay for the right to sell music. However, the sale of merchandise was not in any way tied to the bonuses.

A Ponzi Scheme – What Is It?

This investment scheme is also a fraud. Here, on investments from new investor-driven capital, an operator pays returns. What's the problem? Legitimate investment profits should be used to pay returns. With supposed abnormally high short-term return rates, the operators of Ponzi schemes entice new operators.

How does the perpetrator profit? They either just cut-and-run with the funds of investors or, on the "investments", they charge fees. Eventually, however, these schemes will fall apart.

Ponzi Scheme Examples

JSG Capital Investments: Through investments in "hot" pre-IPO stocks, high returns were promised by two California men in this fraud. In actuality, no one ever made any investments.

Bernie Madoff: Defrauding investors of billions, this Ponzi scheme ran for nearly 20 years. The wealth management business was run by a Wall Street broker named Bernie Madoff. Thanks to a whistleblower by the name of Harry Markopoulos, the scheme was revealed.

The Big Differences

Both of these schemes are frauds. The big difference is, however, that, with promised returns at a later date, only investment in something from its victims is generally required for a Ponzi scheme.

Unlike Ponzi schemes, by recruiting more people into the scam, the opportunity to "make" money is usually offered to a victim in a pyramid scheme.

In catching these kinds of fraud, whistleblowers are essential. Against perpetrators of both pyramid and Ponzi schemes, the CFTC and SCC bring decisive actions.

Weltz Law For Scams and Fraud 

Do you feel you have been the victim of a Ponzi scheme or a pyramid scheme? Has a friend or relative come to you with concerns that they may have gotten themselves involved in one of these types of fraud? We can help.

At Weltz Law, every day, we assist people who feel they may have been victimized by fraudulent schemes. Contact us today for a free consultation.