A pyramid scheme is formed when a promoter collects money from a certain number of people and instructs them to collect more money from others. The cycle goes on from there. As the pyramid grows, the number of people needed to sustain the pyramid becomes too large. Some people will fail to send in their money, or to recruit others, and the pyramid collapses. The majority of people end up on the bottom of the pyramid and inevitably lose their initial “investment.” They won’t get their money back or earn their promised fortune because no one is beneath them in the pyramid adding new money to the pot.
A Ponzi scheme is a fraudulent investment scheme that uses the money from new investors to pay off the old investors. Although Ponzi schemes are different from pyramid schemes, a pyramid is a good way to understand it. Like a pyramid, you need to get continually bigger groups of investors at the bottom in order to support the people above them. Sometimes a fraudster will get people to reinvest in the Ponzi scheme, which limits the number of new investors they need to recruit. However, if they don’t continually get new investors, they are liable to fall apart.
Here is a brief overview of how the state of New Jersey combats pyramid and ponzi schemes to protect consumers.
|Nicknames||Pyramid nicknames: games, endless chain letters, buying clubs, motivational companies, mail order operations, or investment organizations|
|What is Prohibited||
Pyramid Scheme: A pyramid sales plan is any scheme, whereby a person pays money or some other financial benefit for the chance or opportunity to receive compensation, regardless of whether he also receives other rights or property.
Ponzi Scheme: A swindle in which a quick return, made up of money from new investors, on an initial investment lures the victim into much bigger risks.Generally prosecuted as a federal crime, but can be prosecuted as state-crime under fraud and other state statutes.
|Type of Crime||Felony or Misdemeanor-varies on nature of the crime|
|Who Enforces/Prosecutes the Law?||Office of the Attorney General, Division of Consumer Affairs, (609) 984-5828|
|Punishment||Violators are subject to prison or county jail, probation, fines, restitution to victim, community service, injunction/restraining order, revocation of business license, freezing business assets.|
There are several federal protections that may be available to you. To learn more about federal consumer protection laws, contact the following agencies:
Contact a qualified attorney.