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Pyramid scheme vs. Ponzi scheme

On Behalf of | May 11, 2021 | White Collar Crimes |

Ponzi schemes and pyramid schemes are both white-collar crimes, and although they can appear similar, they have several differences. Individuals in South Carolina may be interested to learn what distinguishes each scheme.

What is a pyramid scheme?

A pyramid scheme is a white-collar crime that pulls in investors and uses new investments to pay off other investors. Recruiters get commissions for bringing new members into the fold. The principles snatch up profits, and fees get kicked up to those higher in the chain.

In these schemes, the people running them will funnel investments from lower to upper levels. Often, an investor is doing nothing more than fund fraudulent or nonexistent operations.

One of the most notorious of these white-collar crimes involves Bernie Madoff. He was a businessman who reportedly made hundreds of millions off investors under fraud claims.

What is a Ponzi scheme?

Ponzi schemes guarantee high returns with little risk. They need a consistent flow of money to survive.

In the 1920s, a businessman named Charles Ponzi offered investors a lucrative opportunity: He promised a 50% return within a few months of their investments. The business was allegedly an international mail coupons enterprise. Ponzi took funds from new investors to pay returns to previous investors.

Ponzi vs. pyramid

Portfolio managers might run Ponzi schemes. When investors want to see a return, managers pay with funds coming from new investors.

With a pyramid scheme, investors recruit new investors. The recruits are then responsible for bringing in new investors. Often involving the selling of a product or service, investors buy the right to participate in the marketing of said product or service.

What both of these schemes have in common is that originators knowingly mislead investors. The schemes either fall apart when investors stop joining or someone runs off with the funds.

A person who has been accused of running such a scheme or committing a similar white-collar crime may want to speak to a defense attorney. Getting legal assistance may help in crafting a strategy for fighting criminal charges.