Pyramid and Ponzi schemes are two types of investment fraud. They are both similar in that they often promise investors a way to make money, but in reality, these schemes involve paying members who have been participating the longest with the money that is brought in by new investors. Both Ponzi and pyramid schemes are illegal and are generally considered to be white collar crimes.
While there are similarities in these two types of schemes, there are also several differences. Pyramid schemes generally work by members paying a fee so that they can become distributors of a product. They then recruit other people to become members so that they can receive their payments. In most cases, there is not actually a product that members sell, merely the promise of one. Those who participate in Ponzi schemes, on the other hand, do not generally recruit others and there is no discussion of a product to sell, only a return on their investment.
The problem with both of these types of schemes is that the operator of the pyramid or Ponzi scheme must continuously have new people joining or investing so that investors can get paid. At some point, there are either no more people available to recruit or investors to invest. The pyramid and Ponzi schemes then collapse with the newest people to join generally being the ones to lose the most money.
Defendants who find themselves facing charges after having participated in a pyramid or Ponzi scheme can benefit from the counsel of an experienced Maryland criminal attorney. Because the penalties can vary, it is important to have skilled council by your side.
Source: U.S. Securities and Exchange Commission, “Ponzi Schemes” Nov. 06, 2014