What’s the Difference Between a Ponzi Scheme or Pyramid Scheme and MLM?
Ponzi schemes, also called pyramid schemes, are on the rise. In fact, state and federal authorities uncovered 60 alleged types of Ponzi schemes in 2020, totaling more than $3.25 billion in investor funds. This constitutes the largest amount of money unearthed in these scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.
It seems like it should be obvious when something is a Ponzi scheme, but often companies operate under the disguise of a multi-level marketing company, or MLM, to entice and trap victims. Through these schemes, it is possible for victims to become recruiters, and become part of federal investigations and lawsuits.
In this brief article, our team at The Rickman Law Firm, including a Tampa fraud defense attorney, shares a few important distinctions between a Ponzi scheme and an MLM and what to do if you find yourself involved in a fraud investigation.
Definition of a Ponzi Scheme
The technical definition of a Ponzi scheme is “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.”
This form of fraud lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. In many instances, these schemes are veiled as legitimate businesses or multi-level marketing companies. At each level of these schemes, the number of investors increases with a small group of promoters at the top who require investments from more and more people to pay back the initial investors. If you were to write this out, you would find the shape of a pyramid, which is where the term pyramid scheme comes from.
Running a Ponzi scheme, and even becoming an active or knowing participant in one, is a federal crime and is investigated by the Federal Bureau of Investigations (FBI).
What’s the Difference Between an MLM and a Ponzi Scheme?
Just because some Ponzi schemes masquerade as a MLM does not mean that all MLMs are actually Ponzi schemes. The key distinction is that a Ponzi scheme does not offer a tangible product or real service, whereas traditional MLM programs are legal because there is a real product that is being sold through the channel.
For example, companies like Avon, Lularoe, Herbalife, and others are fully legal because although they do rely on a network of consultants who recruit other consultants, they are selling tangible products. These companies may rely on an investment made by each consultant to purchase the products for sale, but they are not participating in a Ponzi scheme and generally don’t need to worry about being indicted as consultants or recruiters in any type of fraud investigation.
What if I am Being Charged with Ponzi-Related Fraud?
If you’ve found yourself involved in a Ponzi scheme, whether initially as a victim who in-turn recruited others or involved in the company since its inception, it’s important to get an experienced Tampa fraud defense lawyer to protect yourself. You may be facing both federal and state charges, which can be difficult to defend on your own. Contact our team at The Rickman Law Firm to help you understand all of your options.
For a free consultation with a Tampa fraud defense lawyer, please contact The Rickman Law Firm today.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.