Ponzi and pyramid schemes: 6 of the most famous financial scams

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From Ponzi schemes to pyramid schemes, investment scams are common. But how do you spot one of these scams, and how do you know if an investment opportunity is too good to be true? Let’s take a look at these scams in action so you know what to watch out for. 

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What is a Ponzi scheme?

Named after scammer Charles Ponzi, a Ponzi scheme is, put simply, fraud.

Essentially, a scammer approaches people and promises them high returns if they invest in a particular scheme. The scammer never invests the money, though. They pay off the old investors by tricking more people into investing their money.

So, yes, some investors might get their money back, but it’s not because they invested in anything – the scammer is just transferring money from one investor to another!

Here are three modern examples of Ponzi schemes in action. 

1. Scott Rothstein 

Back in 2010, Rothstein pled guilty to running a $1.2 billion Ponzi scheme in Florida. He presented himself as a leading lawyer who knew how to get guaranteed legal settlements.

Rothstein attracted multiple investors, but the scheme eventually fell apart and he’s now serving a 50-year jail term. 

2. Kautilya Pruthi

In the UK, Pruthi received a 14-year jail sentence for scamming people out of £115 million. He encouraged hundreds of people to invest with him, including Game of Thrones actor Jerome Flynn, and he used the money to fund a luxury lifestyle.

To date, it’s the UK’s biggest Ponzi scheme. 

3. Bernie Madoff

Madoff ran the biggest Ponzi scheme in history. Over several decades, he duped investors out of $20 billion. Why was he so successful? Well, he didn’t promise unrealistic returns, and he presented himself very persuasively. Eventually, he received a 150-year sentence, but he died in jail back in 2008.

The bottom line with a Ponzi scheme

There’s no such thing as ‘guaranteed returns’. Every investment carries risk, and there’s always a chance you’ll get back less than you put in. So, if you’re offered a guaranteed return, it could be a Ponzi scheme. 

How is a pyramid scheme different to a Ponzi scheme?

Like a Ponzi scheme, a pyramid scheme involves multiple investors. However, a pyramid scheme works from a multi-level marketing (MLM) business model.

Typically, members pay to invest in a business. They earn some money by selling a company’s products. However, to earn more money, they must recruit more investors ‘underneath’ them. These investors recruit their own investors underneath them, and so on until there’s a pyramid.    

What separates pyramid schemes from legitimate MLM companies? Well, MLM companies filter legitimate profits down to their investors. A pyramid scheme, however, pays investors from the money paid in by new recruits – much like a Ponzi scheme. Here are three examples to show you how a pyramid scheme works. 

1. Give and Take

In 2014, six women were convicted of conning around 10,000 people out of over £20 million.

The women asked each person to invest £3,000 on the promise they would receive £20,000 back when more people signed up for the scheme. However, the scheme collapsed when they failed to find new recruits, and most people lost their investments. 

2. BurnLounge

Back in 2004, BurnLounge invited people to open their own online music stores in exchange for a fee.

People who signed up earned more money for recruiting new investors, and the cycle continued until the FTC finally shut it down, ordering BurnLounge to pay out $17 million in compensation to those who lost money through the scheme. 

3. Irish Liberty/Speedball

In west Cork, back in the early 2000s, people invested up to €10,000 each in the Liberty and Speedball schemes. What did they get for their money? €80,000, if they travelled to Germany to collect it, and encouraged more people to join the scheme. 

The scam cost people around €20 million, but it prompted Ireland to tighten its laws around pyramid schemes like this one.   

The bottom line with a pyramid scheme

How can you spot a pyramid scheme? Well, if you need to pay an upfront fee, you’re expected to recruit new members, and you’re promised good returns, it’s probably a pyramid scheme. Ask a financial adviser if you want help finding investment opportunities instead.

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Takeaway – Ponzi and pyramid schemes

The takeaway? If an investment opportunity seems too good to be true, then there’s a good chance it’s a Ponzi scheme or pyramid scheme. Seek impartial financial advice before making any investments, and always check the FCA register to ensure a company is real. 

If you suspect you’ve been targeted by investment scammers, or you’ve invested in a pyramid or Ponzi scheme, contact your bank immediately and report the incident to Action Fraud. 

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