Eileen works closely with investors in securities cases and has over a decade of experience in the legal world. She received her law degree from American University in 2005.
Ponzi Schemes vs. Pyramid Schemes
Representing Investors Who Lost Money in Investment Frauds
Ponzi schemes and pyramid schemes are types of securities fraud where existing investors are paid by the contributions of new investors. While similar, these schemes differ in key ways. Understanding the differences between these investment scams can help you both avoid these types of scams, and evaluate your recovery options if you do fall victim to one.
Victim of a Ponzi Scheme or Pyramid Scheme?
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Key Differences between Ponzi Schemes and Pyramid Schemes
Although the terms Ponzi scheme and pyramid scheme are often used interchangeably, there are some important differences between them:
- Getting Involved
Ponzi scheme participants typically believe they invested in an actual security, and are unaware that they are involved in a Ponzi scheme. Although pyramid scheme operators often conceal the true nature of the scheme, participants are typically aware that they are responsible for recruiting new members, and that new members are a source of profit for existing members.
- Level of Involvement
After their initial investment, Ponzi scheme participants are not actively involved in the scheme. This often makes it harder for investors to identify the Ponzi scheme. Pyramid schemes require more active involvement, as existing participants are required to recruit new participants to contribute to the scheme.
- Source of Payments
In both Ponzi schemes and pyramid schemes, existing investors are compensated by the contributions of new investors. Ponzi scheme participants believe they are earning returns from their investment, while pyramid scheme participants are aware that they are earning money by recruiting new participants.
- How Long it Takes to Collapse
Ponzi schemes can often take many years to collapse, provided there are sufficient numbers of investors. A good example of this is the Ponzi scheme operated by Bernie Madoff for over 30 years. In contrast, past pyramid schemes have typically collapse quickly, due to the rapid growth required to sustain them.
Pyramid schemes are also often disguised as multilevel marketing businesses (MLMs). Visit our pyramid scheme page to learn more about Pyramid Schemes vs. MLMs.
Can I recover my losses from an investment scam?
While Ponzi schemes and pyramid schemes are each different in their approach, both models are illegal and inevitably result in investor losses. Past victims of investment scams have recovered millions of dollars from those who conned them into investing.
Each Ponzi schemes and pyramid schemes is different and, therefore, must be evaluated on an individual basis. Our attorneys can provide you with a free case evaluation and discussion of your options. You may be eligible to recover your losses.
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