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What is the Difference between a Ponzi Scheme and a Pyramid Scheme?
By Janet Jenson
Many of the opportunities to earn online are legitimate businesses, but many are nothing more than Ponzi and pyramid schemes. The U.S. Federal Bureau of Investigation (FBI) warns prospects that "If the offer of an 'opportunity' appears too good to be true, it probably is." This statement is made on a page they have published online to warn citizens about common fraud schemes. However, the U. S. Securities and Exchange Commission also has some interesting things to say about these schemes. They point out the similarity between pyramids and Ponzis. That is, they both make their money not from the sale of a legitimate investment, product, or service, but from funding old members with cash obtained from new members. Then they go on to describe the difference in an easy to follow chart. Basically, they explain that a pyramid scheme depends on members recruiting others where there is no actual investment nor is there a legitimate product, although the operators of the pyramid scheme may pretend there is. They depend upon their victims to find them more victims and thus involve the members of their scheme in perpetrating the fraud. When they run out of victims, the pyramid scheme collapses very quickly. In contrast, a Ponzi scheme offers high returns on an investment that may not exist. The principals generally have direct personal contact with each victim and members are not required to recruit, and unlike the pyramid scheme, the Ponzi may not collapse all at once, but rather over the course of some time. The SEC site also lists common warning signs that an investment may not be legitimate. I think everyone should check out their page. Through internet marketing, these schemes seem to be getting slicker lately, and we are starting to see some otherwise intelligent people being fooled by them so it is good that people should become informed. Larger amounts of cash are usually lost in a Ponzi scheme than in a pyramid, but the members of a pyramid scheme are victimized by being used to defraud others. Thus while they may not lose a lot of money, they risk reputation. We do well to remember the lines that Shakespeare put in Iago's mouth in Act 3 of Othello, scene 3, lines 155-161:
Good name in man and woman, dear my lord,
Is the immediate jewel of their souls.
Who steals my purse steals trash;
'tis something, nothing;
'Twas mine, 'tis his, and has been slave to thousands;
But he that filches from me my good name
Robs me of that which not enriches him,
And makes me poor indeed.
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Ponzi Schemes – Frequently Asked Questions
| Common Fraud Schemes
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Congrats on your Front Page article! Definitely an awesome and useful article, as I for one always thought they were one and the same. Keep up the good work!
 |  | nick Feb 8, 2010 10:17 | |
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