pyramid scheme

Ponzi Schemes vs. Pyramid Schemes: What’s the Difference?

Ponzi schemes and pyramid schemes are types of white-collar crime. Although people sometimes confuse them, they each use different tactics to fraudulently separate people from their money. In this article, we discuss the differences between Ponzi schemes and pyramid schemes. 

What is a Ponzi Scheme? 

A Ponzi scheme is a type of white-collar crime in which the operator of the scheme pays returns on investments from capital collected from new investors rather than from actual investment profits. Ponzi scheme operators recruit new investors by offering artificially high rates of return. These types of schemes are a priority to the Department of Justice.

Ponzi scheme operators profit by either charging fees on investments or simply disappearing with investors’ money. Ponzi schemes collapse when operators fail to generate enough new capital to pay the continually growing pool of existing investors. The scheme is named for a man named Charles Ponzi, who launched a scheme in the 1920s that guaranteed investors a 50% return on investments in postal coupons. Ponzi’s scheme fell apart when he was unable to pay later investors.

Ponzi Scheme Examples

There have been several high-profile Ponzi scheme cases. One involved a broker named Bernie Madoff, who operated a Ponzi scheme for nearly 20 years that defrauded investors out of billions. Another scheme involved a company called JSG Capital Investments. In the JSG Capital Investment scheme, two men promised high returns via investments in pre-IPO stocks. However, no actual investments were ever made.

What is a Pyramid Scheme? 

A pyramid scheme is a fraudulent business model in which new members are offered payments based on their ability to enroll future members in the scheme. As the membership pool grows, recruiting new members becomes impossible, and the business becomes unsustainable. 

Pyramid Scheme Examples

There have been several highly publicized pyramid scheme cases. One high-profile pyramid scheme case involved an online music store called Burn Lounge. The store charged people to sell music and offered them awards for recruiting other individuals into the business. The bonuses, however, were not tied in any way to merchandise sales. Another high-profile scheme involved a program called Give and Take. This scheme involved a group of operators who requested a £3,000 entry fee and promised a £20,000 bonus in return for recruiting new members.

Contact a White-Collar Crime Defense Attorney 

If you’re facing white-collar crime charges, you should contact an experienced white-collar crime defense attorney as soon as possible. At Griffin Durham Tanner Clarkson LLC, our white-collar crime defense attorneys are prepared to provide you with an aggressive defense against multiple types of white-collar crime accusations. In addition, our talented white-collar crime defense lawyers work across the United States, meaning that we can represent you regardless of where you reside in the country. Please contact us as soon as possible to schedule a free consultation with one of our talented and knowledgeable white-collar crime defense lawyers.