Ponzi Schemes Versus Pyramid Schemes Explained

A form of white collar crime that most New Jersey residents have heard about and some have unfortunately become first-hand familiar with is the fraudulent investment scheme. This trap usually comes in the form of a purported investment opportunity that promises a return on investment that is the epitome of the saying, “Too good to be true.” There are many types of fraudulent investment schemes, from supposed foreign royalty looking for someone to help them to deposit large sums of money to insider trading on the stock market.

This post will address two of the most common investment frauds that you may see in New Jersey: the Ponzi scheme, and the pyramid scheme.

These two fraudulent schemes have some similarities: both rely on a fresh influx of new “investors” to provide the cash needed to pay earlier participants the fantastic returns they were promised. And both eventually run dry if they are not discovered and prosecuted first, leaving many hopeful investors with nothing in return for their contributions.

There are some distinctions to be aware of between these two crimes, so they should not be used interchangeably with one another.

The key element of the Ponzi scheme is that it often relies on investor trust in the scheme’s creator to do all the work in return for a one-time payment, although additional payments may also be asked for. But the contributor usually has a passive role aside from sending in money.

A pyramid scheme’s distinctive feature is that it usually requires not only an upfront payment or repeat payments, but also that the participant then recruit others to participate as well. Indeed, new participants may never interact with the pyramid scheme’s original creator, but rather with someone one level above them in the multi-layered pyramid organization.

Pyramid schemes tend to break down more quickly than Ponzi schemes, because the latter is often smaller and has stronger misplaced trust bonds between the creator and the contributor while the former requires ever larger additional layers to the pyramid to keep going and will run out of fresh contributors more rapidly.

Not all multi-layered investment or business strategies are illegal. If you are charged with running a Ponzi or a pyramid scheme when in fact your business is legitimate, such as a multi-level marketing system, a criminal defense attorney’s assistance will be essential in defending yourself legally.