The premise is simple: promise high returns to investors and use money from previous investors to pay new investors.
Pyramid schemes are a form of the Ponzi Scheme named for famed swindler Charles Ponzi, who in the early 1900’s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists.
The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these scam artists simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.
Except for the criminals that started the scheme! Con artists typically attribute government intervention as the reason why new investors did not get their promised returns.
Ponzi schemes take many forms. One of the more popular Ponzi or pyramid schemes is known as The Airplane. The Airplane consists of, you guessed it, a pyramid consisting of 8 passengers, 4 flight attendants, 2 co-pilots, and 1 pilot. When you join this scheme, you pay an entry fee. You must then recruit 8 new people. Once you do this, you become a flight attendant. Your new people must then each recruit 8 new passengers. You are, of course, promised the chance to make lots of money.
Chain letters are another common Ponzi scheme. These letters ask the recipient to send money to a number of people on a list that is received with the letter. You then add your name to the bottom of the list. Next, you send out a similar letter hoping that other people will respond. Naturally, these letters appeal to our sense of greed, promising vast wealth for little effort.
For example, certain groups that call themselves “gift parties” require that everyone who joins donate $4,000. All the cash goes to the person who is at the “top.” You are told that as soon she has received a certain amount of money, she will step down and nominate the next person to be on top.
Ponzi schemes are illegal no matter what form they make take. Chain letters are probably even more illegal because they involve the United States (or whatever country you may be in) Postal Service, thus inviting mail fraud charges as well as the felony charge for running the Ponzi scheme.
Ponzi schemes are very easy to avoid, but it requires the knack of avoiding a get rich quick mentality. Anybody that promises you lots of money for doing virtually nothing is most likely up to a scam. If the “only” things you need to do is pay your membership fee and recruit a few new members, then you are most likely looking at a Ponzi scheme.