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.

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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 both 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 scheme 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.

Noteworthy Financial Fraud Cases

American Express Financial Advisors Securities Litigation $100 million cash settlement for clients alleging American Express steered them into under-performing “shelf space funds” to reap kickbacks
Chase Bank “Check Loan” Litigation $100 million settlement for consumers alleging Chase offered long-term fixed-rate loans, only to later more-than-double required payments
Peregrine Financial Group Customer Litigation Settlements worth $75 million for futures and commodities investors who lost millions in the collapse of Peregrine Financial Group, Inc.
NantHealth Court-appointed Co-Lead Counsel in a securities class action alleging the company’s founder violated federal securities law and artificially inflated stock prices

Get a Free Evaluation of Your Claims

Speak with one of our securities attorneys if you believe you were the victim of a ponzi or pyramid scheme.

Michael Schrag

Michael has over 20 years of experience representing individual and small business plaintiffs against the world’s large financial institutions, including Visa, Mastercard, and Chase.

Eileen Epstein

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.

David Stein

David’s advocacy has generated major recoveries for consumers impacted by financial fraud. He was named to the Top 40 Under 40 by Daily Journal and a “Rising Star in Class Actions” by Law360.

Amanda Karl

Amanda is spearheading a securities lawsuit against NantHealth concerning fraudulent statements to investors about the success of its key product.

Our Financial Fraud Experience

Gibbs Law Group’s financial fraud and securities lawyers have more than two decades of experience prosecuting fraud. Our attorneys have successfully litigated against some of the largest companies in the United States, and we have recovered more than a billion dollars on our clients’ behalf.

We have fought some of the most complex cases brought under federal and state laws nationwide, and our attorneys have been recognized with numerous awards and honors for their accomplishments, including Top 100 Super Lawyers in Northern California, Top Plaintiff Lawyers in California, The Best Lawyers in America, and rated AV Preeminent (among the highest class of attorneys for professional ethics and legal skills).