While Pyramid schemes and Ponzi schemes are often lumped together, and both are well-known forms of investment fraud , the differences between these two types of stockbroker malpractice lie in the organization of the scam and the number of people involved in perpetrating it.
Ponzi Schemes – Stockbroker Fraud through Misrepresentation
A Ponzi scheme is built meticulously from the ground up. What makes these scams so difficult to detect is the care with which the deception is handled. An unscrupulous broker begins by creating false documents, which he then uses to lure investors. The money he gathers does not go into any real investments, however, but into his own pocket.
As the scheme progresses the broker secures additional investors, and uses their funds to continue to line his own bank account, as well as returning some to the initial parties to support the illusion that their investments are creating dividends. When there are no more new investors, this form of investment fraud is usually exposed.
Pyramid Schemes – An Insidious Type of Securities Fraud
One of the differences that makes a Pyramid scheme more difficult to detect than a Ponzi scheme is the sheer number of people involved, which lends the scam credibility in the eyes of investors. Rather than recruiting investors, the perpetrator of this scam recruits more recruiters.
Each investor is expected to bring more investors on board working under him, and the money is then disseminated to the levels above. This creates an organizational structure similar to a pyramid, hence the name. Since these scams lack a solid foundation in goods or services, the pyramid collapses once no new investors can be found.
They May be Different, but both are Financial Fraud
The main difference between these scams is the structure. Pyramid schemes work in a top-down manner, involving multiple levels of investors. Ponzi schemes, on the other hand, have a more circular structure centered around the perpetrator of the scam, with all investors on equal, illegitimate footing.
Both, however, are not only unsupportable business models, but also illegal. Perpetrating either of these scams can result in heavy fines and, in some cases, prison sentences. If you think you’ve been adversely affected by ponzi or pyramid scheme, check out our stock broker fraud blog. If you are accused of a financial fraud and white collar crimes, contact an attorney.