Ponzi Scheme / Pyramid Scheme

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These schemes have existed for at least a century, some with variations to hide their true nature. What is ponzi scheme? A Ponzi scheme, also known as a Pyramid Scheme or High Yield Investment Program (HYIP) is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors. Usually, the term Ponzi scheme is applied to pure financial investments while pyramid scheme is used to denote a scheme that is the same in essence but uses some kind of (usually worthless or overpriced) product or service as a vehicle for the scheme as in MLM.

What is a pyramid scheme

diagram of a Bonzi pyramide
This is a pyramid scheme.

A Ponzi or pyramid scheme involves luring in investors with promises of high returns. The con artist invents a story to explain how the high returns are generated, but in reality she simply pays the first investors with money obtained from later investors. It’s a take-from-Peter-to-pay-Paul system. As long as the scam artist manages to recruit larger and larger numbers of new investors (aka suckers) the system works, but as soon as the flow of new money stops, it collapses. Ponzi schemes always collapse, sooner or later. Multilevel marketing (MLM) or pyramid selling is also a pyramid scheme.

A pyramid scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The pyramid scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a pyramid scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

Pyramid scheme scam

diagram of a Pyramid Scheme
On the 13th level all the population of the world is involved,
any Marsians?

People are putting money into online scams knowing they are fraudulent. Investors use website tools to help them spot when best to cash out. Their huge returns depend on more and more people being enrolled in the scam. As with all pyramid schemes, early investors rely on the naivete of late entrants who may not be aware that they are joining a financial scam that is likely to cost them dear. While the instigator of the fraud makes money, most participants spend a lot of time recruiting more members to prop up their ever dwindling returns. But running one of these pyramid scams is certainly far more lucrative than investing in one.

There are aggregator or “tracker” sites that monitor the pyramid schemes, some of which last for months. The trackers detail the returns the different pyramid schemes were paying out. The highest return claimed was an interest rate of 440% in 10 minutes, but many other investors would receive the more modest figure of 1-2% a day.

A spokesman for the UK’s Financial Services Authority cautioned against getting involved in a pyramid scheme, even at the early stages. “Consumers should be wary of any investment offering amazing returns,” he said. “If it sounds too good to be true, it probably is.” He added, because the investment scams were by definition unauthorised, consumers would have no protection or means to recover their money when they collapsed. In addition, he said, education could help people spot such schemes. You need the basic knowledge that 1% a day just cannot work. Investors cash in on web-based scams.

Madoff ponzi scheme

Bernard L. Madoff ponzi scheme
Madoff run the world’s largest unregistered hedge fund.

Madoff was born on 29 April 1938. Madoff’s grandparents were Jewish emigrants from Poland, Romania and Austria. In 1960 Madoff founded the Bernard L. Madoff Investment Securities LLC. The firm started as a penny stock trader with $5,000 that Madoff earned from working as a lifeguard and sprinkler installer. In the 1970s Madoff turned his wealth management business into a massive Ponzi scheme. The computer system his firm used to disseminate its quotes evolved to the NASDAQ eventually. Madoff’s sales pitch was an investment strategy consisting of purchasing blue-chip stocks and taking options contracts on them, sometimes called a split-strike conversion or a collar. By 2000, Madoff Securities, one of the top traders of US securities, held approximately $300 million in assets, Madoff run the world’s largest unregistered hedge fund. The business occupied three floors of the Lipstick Building, with the investment management division, referred to as the “hedge fund”, employing a staff of approximately 24. Madoff ran a branch office in London, separate from Madoff Securities, which employed 28, handling investments for his family of approximately £80 million. Two remote cameras installed in the London office let Madoff to monitor events from New York.

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One reason that Madoff was so successful was that he was a highly respected, well-established and esteemed financial expert. He earned his investors’ trust because whenever they requested a withdrawal, Madoff’s investment company got their money to them promptly. In addition, unlike other Ponzi schemers, he didn’t tempt investors with unbelievable returns, Madoff reported moderate returns to his investors.

Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme. Madoff, 73, pleaded guilty to fraud in 2009 and is serving a 150-year term for cheating investors out of $20 billion in principal.

Some analysts alerted that it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. Investigations of Madoff Securities LLC at least eight times over a 16-year period by the U.S. Securities and Exchange Commission (SEC) and other regulatory authorities found no evidence of fraud. It was said: “Doubt Bernie Madoff? Doubt Bernie? No. You doubt God. You can doubt God, but you don’t doubt Bernie.”

Is a pyramid scheme illegal

Pyramid schemes are not illegal because they involve recruiting people to recruit other people to recruit other people. That is perfectly legal and is done to some degree in many legitimate businesses, not just MLMs. They are not illegal because they involve giving money to people. It is perfectly legal to give money to people. They are illegal because they involve deceiving people in order to get money from them: that is the legal meaning of fraud.

Question - is a pyramid scheme illegal?
Is a pyramid scheme illegal?

The FBI website states: pyramid schemes, also referred to as franchise fraud or chain referral schemes, are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.

As the term “illegal” refers to the legislation, then whether a pyramid scheme is illegal or not depends on the name organisers give to it and varies from country to country. Allen Stanford found guilty in $7bn Ponzi scheme, he faces a sentence of up to 20 years in prison for the most serious charge. Kautilya Pruthi jailed for UK’s biggest Ponzi scam worth £115m - A corrupt businessman who masterminded the UK’s biggest Ponzi scam has been jailed for more than 14 years. Ponzi scheme pair not guilty of deception. HM Courts & Tribunals Service.

“I want either less corruption or more chance to participate in it.” has Ashleigh Brilliant said once.

Example of a pyramid scheme

example of a pyramid scheme
A great example of how a pyramid scheme works.

Chain letters such as the infamous “Make Money Fast” emails from the 1990s are an example of a pyramid scheme.

Many Facebook based games that involve inviting friends to progress or earn rewards are examples of pyramid schemes.

An example of how a pyramid scheme works:

  1. Original investors are initially rewarded with a high rate of return on their investment, but they need more investors in the scheme to maintain that level of return.
  2. More investors are conned into joining the scheme, but as their investments are used to pay the original investors returns and inflate the scheme, they receive less returns on their investments. They in turn seek more investors to increase their returns.
  3. Still more investors join the scheme, but receive still fewer returns on their investment. They cycle continues until the number of new investors dwindles, returns dry up and the scheme collapses. No matter how large the model becomes before collapse, approximately 88% of all people will lose.

Ponzi scheme history

portrait of Charles Ponzi, father of Ponzi Scheme
Charles Ponzi, father of Ponzi Scheme.

The first Ponzi schemes were set up by Boston fraudster Charles Ponzi (1883-1949), an Italian immigrant in the 1920s. There were pyramid schemes before Ponzi came along, but his was so outrageous that this type of scam has ever since borne his name.

Ponzi’s bait to lure in investors was the idea that postal coupons purchased in Europe could be redeemed in America for six times their value, because of the difference in currency values. He established a company in late 1919 to take advantage of this discovery and invited people to invest with him, promising them that his scheme was so lucrative that they would double their money in ninety days. Charles Ponzi and the Ponzi Scheme

WinCapita was a scheme run by Finnish criminals that involved about €100 million.

The 1997 rebellion in Albania was partially motivated by the collapse of pyramid schemes.

Allen Stanford fraud

15 June 2012. Disgraced tycoon Allen Stanford has been sentenced to 110 years in jail for operating a Ponzi scheme that defrauded investors of more than $7bn. Some 30,000 individual investors were swindled, it was alleged. Prosecutors failed to find as much as 92% of the assets Stanford International Bank claimed to have. The scheme was described as one of the largest in US history. In court, Stanford denied any guilt, telling the judge at his sentencing hearing: "I did not defraud anybody." Forbes Magazine listed him as the 605th richest man in the world in 2006. However, since his arrest in 2009 he has spent three years in detention after being denied bail.

What is pyramid scheme, also known as a ponzi scheme? Is a pyramid scheme illegal? Example of a pyramid scheme and ponzi scheme history.