The Differences Between Ponzi Schemes and Pyramid Schemes

The Differences Between Ponzi Schemes and Pyramid Schemes

Ponzi schemes and Pyramid schemes share many of the same characteristics. They are both investment related scams where existing investors are compensated by the contributions of new investors. In both schemes unsuspecting people are fooled by promises of extraordinary returns on their investments.

The difference between and Ponzi and a Pyramid scheme is that in a Ponzi scheme investors believe they are earning returns on their investment, while Pyramid scheme investors understand that they are earning returns from the recruitment of new participants.

Ponzi Schemes

Ponzi schemes are rooted in fraudulent investment management services. In a ponzi scheme, investors contribute money to a portfolio manager who makes promises of high returns. When those investors want their money back, they are paid with the funds coming in by newer investors. In lieu of actual investment activities, the portfolio manager transfers funds from one client to another.

Ever since Bernie Madoff was indicted for his massive Ponzi scheme over many decades, considered to be the largest financial fraud in U.S. history, prosecutors have remained tenacious in their pursuit of punishing people accused of Ponzi schemes. Most people erroneously believe that these schemes are run by rich players on Wall Street who prey on unsuspecting victims. The fact is that many Ponzi schemes do not start out as fraudulent, but are the result of bad planning and panic. If the legitimate investments do not perform well, the person offering the investment may panic and use incoming cash to pay off earlier investors. Eventually the flow of money dries up and the whole scheme collapses.

Pyramid Schemes

The FTC says pyramid schemes “promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.”

From the start, pyramid scheme investors know their earnings come from recruiting new investors. The structure is such that the initial person creating the scheme will recruit other investors, who will recruit other investors, and so on. Participating in the pyramid schemes will often come with some sort of “investment opportunity,” such as the ability to sell certain products. When investors sell products or recruit new investors, they must share the proceeds with investors higher up on the pyramid structure.

Illegal pyramid schemes are not to be confused with multi-level marketing (MLM) campaigns. MLM’s operate a legal form of direct selling and offer legitimate products.

While Collar Crime Defense Attorneys

If you have been charged with involvement in a Ponzi scheme or pyramid scheme, you need the help of an experienced white collar crime defense attorney. Ashley D. Adams is a former fraud prosecutor with the U.S. Attorney’s Office. She has insider experiences to use in your defense. Contact Ashley D. Adams, PLC today (480) 219-1366 to schedule a free consultation to discuss your case.