New York Pyramid and Ponzi Scheme Laws

When it comes to pyramid and Ponzi schemes, Bernie Madoff is a name that comes to mind immediately -- especially in New York. However, many people do not understand the schemes that Madoff carried out. Also, people often refer to pyramid and Ponzi as being the same thing, but they are different. It is not surprising that the schemes are confused since they share a lot of similarities. Both schemes involve unscrupulous and dishonest investors who dupe the unsuspecting public with the promise of extraordinary returns; both are a form of financial fraud; and both are illegal both nationally and in the state of New York.

Pyramid Schemes in New York

A pyramid scheme, or a chain-distribution scheme as they are called in New York, is a non-refundable investment where the ability to make a monetary return is based on the investors recruiting additional people to invest. Here, the fraudulent investors make the scheme appear to be legitimate, but in reality, the pyramid scheme investors just use the money coming in from new investors to pay off the earlier stage investors.

An example is participating in a so-called gifting program that purports to do something positive such as empowering women by redistributing wealth. The lowest level participants give or "gift" an amount of money to participate. The next level consists of participants who successfully recruited ten additional participants. Finally, at the top level of the pyramid sits participants who received "gifts" from the lowest level people. Eventually when the participants run out, the pyramid collapses and the scheme implodes.

Ponzi Schemes in New York

The pivotal distinction from a pyramid scheme is that in a Ponzi scheme, the participants believe that they are actually earning returns from their investment, while pyramid scheme participants are aware that they are earning money by recruiting participants. Here, an investor like Bernie Madoff approaches others to be investors in some sort of business venture. The investors believe they are getting money from the actual investment. In reality, the unscrupulous "Madoffs" of the scenario are actually shuffling the money around.

A Ponzi scheme also differs from the pyramid scheme because it can often go on for a much longer period of time, provided that a sufficient number of investors exist. For instance, Bernie Madoff successfully operated a Ponzi scheme for over 30 years until clients began demanding money that he did not have.

New York Pyramid and Ponzi Scheme Laws at a Glance

The chart below provides a summary of state laws related to New York pyramid and Ponzi scheme laws including links to important code sections.

Statute

 

Penalties and Sentencing

 

  • Class E felony: punishable by a sentence of a maximum of four years and a minimum of between one year and 16 months jail time.
  • Because pyramid and Ponzi scheme charges are often coupled with federal charges of tax fraud, tax evasion, and securities fraud, you can face a variety of additional penalties including up to two decades incarceration.
  • Fines and restitution to the victim are also possible.

Possible Defenses

  • The business was a legitimate business and not set up as a pyramid scheme
  • Actual products/services were sold
  • Lack of intent -- did not knowingly promote such a scheme

Related Offenses

Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.

New York Pyramid and Ponzi Scheme Laws: Related Resources

Contact an Experienced Criminal Defense Attorney

New York pyramid and Ponzi scheme laws can be very confusing. There can be a thin line between a pyramid scheme and a legitimate business opportunity and in some cases it's difficult to tell the difference. If you're facing charges due to your involvement in a pyramid or a Ponzi scheme, you probably want an advocate on your side. Consider talking to an experienced New York criminal defense attorney today.

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