Ponzi Schemes and Pyramid Schemes Both Present Significant Risks for Investors
Among the numerous types of investment fraud scams, Ponzi schemes and pyramid schemes are perhaps two of the most well-known. However, they are also both frequently misunderstood, and many people assume that Ponzi schemes and pyramid schemes are synonymous with one another.
But this is not the case. There are important differences between Ponzi schemes and pyramid schemes, and, as an investor, it is important to know how to spot both. If you are only watching for the signs of a Ponzi scheme, you could fall victim to a pyramid scheme, or vice versa.
Key Differences Between Ponzi Schemes and Pyramid Schemes
The major difference between Ponzi schemes and pyramid schemes is in the way they operate. In a Ponzi scheme, victims simply invest, while pyramid schemes involve getting investors to help recruit new victims:
- Ponzi Scheme Operation – In a Ponzi scheme, investors make an up-front investment in what appears to be a legitimate security or other investment product. The scheme’s operator continues to recruit new investors, and rather than investing their funds, the operator uses new investors’ funds to pay fabricated “returns” to prior investors—while pocketing the majority of the funds for personal use.
- Pyramid Scheme Operation – In a pyramid scheme, investors typically buy into a “business opportunity” which involves recruiting other investors. The more recruits an investor has, the more the investor makes from the scheme. However, the profits ultimately flow up to the scheme operator at the top of the pyramid, and eventually, the operator disappears with investors’ funds, leaving the pyramid to come crumbling down.
Other differences between Ponzi schemes and pyramid schemes include the marketing techniques scam artists use to promote each type of scheme, as well as the ways in which scam artists communicate with victims who have fallen for their schemes. For example, in a Ponzi scheme, the scheme operator will often send investors fabricated account statements that make it appear as though investors are earning legitimate returns. In a pyramid scheme, by contrast, the scheme operator will often focus on encouraging investors to continue making sales, offering tips, tools and incentives designed to keep investors recruiting new victims.
Ponzi schemes and pyramid schemes are both illegal, and both fall within the enforcement jurisdiction of the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). However, investors who lose money in these schemes must hire their own lawyers to help them recover their fraudulent investment losses. Our lawyers represent victims of Ponzi schemes and pyramid schemes nationwide, and if you are a victim, we can pursue a financial recovery on your behalf by all means available.
Discuss Your Case with an Attorney at Zamansky LLC
If you need to know more about how to protect yourself after falling victim to a Ponzi scheme or pyramid scheme, we encourage you to contact us promptly. To schedule a free and confidential consultation with an attorney at Zamansky LLC, please call 212-742-1414 or tell us how we can reach you online today.