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What is the Difference Between a Ponzi Scheme and a Pyramid Scheme?

Although real-life proves time and time again that get rich quick schemes never play out as intended, the temptation to hop aboard the money train often proves too tempting to resist. Plus, it’s quite easy for the fraudsters to deceptively describe the endeavors as legitimate, setting people at ease long enough for them to sign up and see the truth. By that point, it’s often too late to jump ship, which is why ponzi schemes, pyramid schemes, and other types of investment fraud continue to prevail.

Fortunately, you can explore the difference between the ponzi scheme and pyramid scheme to stay savvy and easily avoid tricks in the future. Ready to get started? Here’s just what you need to know about these two types of investment fraud.

Ponzi Scheme, Defined

A ponzi scheme starts with an investor hyping up a hot investment with a shockingly high return in a short period of time. After that, they collect funds from all the interested individuals that they reel in, all-knowing full well that the investment will never payout as described.

As their plan pays out, they may use funds from the newest investors to pay the old and keep the hype going for as long as possible. Then, to draw the final curtain, they either nickel and dime the investments to death with management fees or simply skip town with the cash in hand.

The first ponzi scheme coined the phrase as Charles Ponzi swindled tons of people out of nearly $15 million by hyping up the riches that could be gained with postal reply coupons. It was all a lie, of course, yet no one knew that until it was too late to get their money back.

Nearly 100 years later, Bernie Madoff kicked off an even bigger ponzi scheme and stole more than $65 billion from would-be investors. Although Madoff ended up going to prison, his investors were the ones left holding the bag since only $3.2 billion has been returned to date.

A Look at Pyramid Schemes

Pyramid schemes work a little bit differently due to their ability to make fraudsters out of all their participants. Instead of hyping up an imaginary investment, this scheme starts with the promise of riches through referrals and product sales. Except, in the end, there is no actual product to sell and the only money to be made is by tricking others to buy into the ruse.

Multi-level marketing (MLM) companies often get a bad rap due to their similarity to pyramid schemes. Despite that, they do not qualify as long as the company offers tangible products and doesn’t just require referrals to make money. Unfortunately, this is often difficult to prove, especially if the company makes products, but has a dicey rewards structure.

The Federal Trade Commission has long set their sights on proving Herbalife is a pyramid scheme, for example, due to their questionable incentive structure. Through a recent settlement, they were able to come to an agreement on how to proceed and avoid investment fraud charges.

BurnLounge, on the other hand, was not so fortunate. Unlike Herbalife, they did pay not for successful product sales. Instead, they simply issued incentives for recruiting other people to sign up, meeting the definition for a pyramid scheme. They were hit with a $17 million judgement as a result, forcing them to close their doors for good.

How to Tell If You’re a Victim of a Fraudulent Scheme

In the end, if something seems like it’s too good to be true, it probably is. Get rich quick schemes all start out the same with big promises of fast, larger-than-life returns on your investment. You may then hit a brick wall in trying to get a payout as promised. All the while, you’ll likely have a gut feeling that something is simply not right with the picture. If you ask for your money back, excuses will undoubtedly come your way if you don’t get altogether ghosted.

If you’re ever wondering if you are a victim of a fraudulent scheme, you can get key insights by speaking with an investment fraud lawyer. They’ll use their experience in the field to look at your situation and let you know if you’ve likely been had. Then, they can help you recoup your losses and move forward with a clear head about how to avoid future scams.

When to Seek Help from an Experienced Lawyer at Schwartz Law

As you explore the difference between a ponzi scheme and a pyramid scheme, you may suspect you or a loved one has fallen victim to investment fraud. If that’s the case, it’s important to reach out to an investment fraud lawyer with Schwartz Law.

You can simply give us a call at 813-226-3372 to discuss the matter during a free, no-obligation consultation. If we take on your case, you won’t pay any fees unless we’re able to recover your damages. So, please feel free to call our team anytime to complete your consultation.

Matthew Schwartz

Matthew Schwartz is a Shareholder at Schwartz, P.A. where he serves as the practice group leader for their securities litigation and professional negligence practice group. His practice is focused on plaintiff-side securities arbitration and litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others. He also represents plaintiffs who have been damaged by their insurance agents, lawyers, accountants and other professionals. He is an accomplished commercial litigator who has handled a variety of business disputes and other consumer claims.

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