Ponzi and Pyramid Chart: What’s the Difference?

The main difference between the two scams is that a Ponzi scheme usually only requires investment in something from its victims, with returns promised at a later payout date. Unlike Ponzi schemes, pyramid schemes often offer the victim an opportunity to “make” money by involving more people in the scam.

Ponzi and Pyramid Scheme: An Overview

Pyramid schemes and Ponzi schemes have many similar features based on the same concept: unsuspecting individuals, unscrupulous who promise extraordinary returns for their money deceived by investors. However, unlike a regular investment, such schemes can only offer consistent “profits” as the number of investors continues to grow. As the number decreases, so does the money.

Ponzi and pyramid schemes are self-sustaining as long as cash outflows can be met by cash inflows. The key differences lie in the type of products the schemers offer their customers and the nature of the two cheats, but both can be devastating if they break.

Ponzi Schemes

Ponzi schemes are based on fraudulent investment management services, basically, investors contribute money to the “portfolio manager” who promises them a high return, and then this When investors want their money back, it is paid out with incoming funds provided by subsequent investors. The person who organizes this type of fraud is responsible for controlling the entire operation; they simply transfer funds from one client to another and forego any real investment activity.

The most famous Ponzi scheme in recent history, the largest investor scam in the United States, was led by Bernard Madoff, who defrauded investors at Bernard L. Madoff Investment Securities LLC for over a decade. Madoff built a large network of investors from which he collected cash and pooled the money of almost 5,000 of his clients into one account from which he was withdrawn. He never really invested the money, and once the 2008 financial crisis took effect, he could no longer sustain the scam. The SEC values ​​the total loss of investors at $65 billion. The controversy ignited a period known as Ponzi Mania in late 2008, when regulators and investment professionals were chasing other Ponzi schemes.

Pyramid Schemes

A pyramid scheme, on the other hand, is that the initial planner must hire other investors who will continue to recruit other investors, and these investors will continue to recruit additional investors later on. is structured. Sometimes there will be an incentive offered as an investment opportunity, such as the right to sell a particular product. Each investor pays the person who recruited them for the chance to sell that product. The buyer must share the proceeds with those at the higher levels of the pyramid structure.

An important difference is that pyramid schemes are more difficult to prove than Ponzi schemes. They are also better protected because the legal teams behind companies are much stronger than those protecting an individual. One of the biggest pyramid schemes to blame was with the nutrition company Herbalife (HLF). Despite being labeled an illegal pyramid scheme and paying more than $200 million in damages, it still sells the products and the share price looks healthy.

Special Considerations

Just as investors should research the companies in which they buy shares, it is equally important to research those who manage their money. It’s helpful to call the Securities and Exchange Commission (SEC) and ask if there are any open investigations or previous cases of fraud against a money manager.

Money managers must be able to provide verifiable financial data; actual investments can be easily checked.

If an investor is considering joining a scheme that looks like a pyramid scheme, it’s worth hiring a lawyer to look for inconsistencies in the documents.