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Ponzi & Pyramid Schemes Explained

The Ponzi Scheme

It is amazing that still today investors big and small get taken in by Ponzi schemes with the promise of unrealistic long term financial returns. The classic definition of a Ponzi scheme: it is managed by a central party, they use the money from new incoming investors to pay off the dividends or ROI (return on investment) to the older investors. Showing consistent returns gives the impression that the company is legitimate, regulated and most importantly profitable even though there is no actual profit produced by the company.

Meanwhile, the people behind the scheme pocket the extra money and use it to expand their operation via marketing and hiring more sales staff to entice new investors. The Ponzi scheme operators will deploy clever and devious tactics to ensure that not many investors try to reclaim their “profits” at the same time. So they convince their clients to keep their investments, and by using this strategy the company benefits from all future profits.

One of the most famous Ponzi schemes in recent history was the “Madoff Scandal” which was a stocks & securities fraud on a global scale, involving as much as $64.8 Billion and spread across 4,800 clients. Bernie Madoff was responsible for one of the longest-running stock market Ponzi schemes that lasted more than 20 years. Bernie Madoff received a sentence of 150 years in prison, as well as the forfeiture of $17.179 billion in assets and money that the financial investigators were able to recover throughout the trial.

A case study conducted by researchers at Cornell University determined that the Madoff Ponzi Scheme was responsible for as much as $363 billion having been withdrawn from global funds, because of the global media coverage “The Madoff Effect” has been the phrase most associated with Ponzi schemes.



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    The Pyramid Scheme

    Pyramid schemes or scams are an extremely aggressive form of MLM (Multi-Level Marketing). The core principle involves the first level members recruiting new members below them. New members are required to pay upfront fees which are split between the directors at the top of the pyramid scheme and the person that recruits new members. This strategy is heavily dependent on consistent growth as each member has to recruit more members at their level of the pyramid.

    In some cases, pyramid schemes try to bypass the local laws by disguising the real purpose in the form of distributorship or franchise of products and services that will be offered to many people within the same region. The company will benefit from the most aggressive salespeople, and the weak ones fall out of the pyramid ecosystem. Whether they offer investment or products the real profit always comes from new members in the chain.

    Many governments and non-governmental consumer protection groups have outlawed pyramid schemes and also refer to them as franchise fraud. People found guilty of conducting these pyramid schemes have received long jail sentences and large scale restitution fines. Some perpetrators have been prosecuted under the international money laundering and have received the harshest of sentences.

    Rapid innovation and widespread access to the internet have been a major catalyst to the increased use of pyramid schemes leading to exponential growth in this illegal enterprise globally. Social Media has been widely used to target unsuspecting investors, forcing social media companies to improve their content and privacy settings to allow users to manage the ads on their profiles that they were exposed to.

    If you are concerned that you have been a victim of a Ponzi or Pyramid scheme and used any of the following payment methods: Credit Card, Wire transfer, Pay-Pal, Skill or Cryptocurrencies, we would like to assist in the recovery of your funds. You do have the right to file a complaint by completing this form or you can speak to one of our agents online for a free consultation.