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Ponzi schemes vs. pyramid schemes

| Jun 22, 2021 | Federal Securities Law |

The Securities and Exchange Commission (SEC) establishes regulations for buying and selling securities, which include stocks and bonds, to prevent investment fraud. Securities fraud is classified as a white-collar crime, or a nonviolent financial scheme. Two common types of white-collar crime in Altoona, Pennsylvania, are pyramid and Ponzi schemes.

Ponzi scheme

The terms “Ponzi scheme” and “pyramid scheme” often get used synonymously, and they are both crimes under securities law, but they differ. A Ponzi scheme lures investors by promising them high profits with minimal risk for a small investment.

This type of fraud gets its name from the most famous offender, Charles Ponzi, an Italian American scammer. Ponzi promised investors a 50% profit if they invested in postal coupons, but he never invested the money.

Individuals commonly make this investment to a “portfolio manager,” who is supposed to invest for them. However, the early investors get paid with money from new investors, which makes it seem like the scheme works. Ponzi schemes commonly continue for many years as long as it gets new recruits.

Pyramid scheme

A pyramid scheme works like a Ponzi scheme except the investors must sell to new recruits. Pyramid schemes commonly involve a product, and the investors earn a commission for new recruits. Unlike Ponzi schemes, a pyramid scheme could operate under a legitimate business, often called multilevel marketing, or MLM.

Another difference is participants know upfront that they need to recruit to earn money. Only investors at the top of the scheme can expect to make any profits from their “downline.” Pyramid schemes often are better protected since the businesses can afford high-powered lawyers with experience in securities law.

Violating securities law often means hefty penalties because of its devastating nature. If a person thinks he or she was charged unfairly, and he or she can fight the charges, a lawyer could help.

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