What to know about pyramid and Ponzi schemes

Florida residents may have heard of the terms "Ponzi scheme" and "pyramid scheme." While the two terms are similar, they're not exactly the same. The big difference between such schemes is that a pyramid scheme does not promise any specific rate of return. Meanwhile, Ponzi schemes do stipulate how much an investor can expect to receive on his or her investment.

However, what the two schemes do have in common is that they are both illegal. Those who participate in such a scam could be sent to prison. As a general rule, each type of scam requires new cash to keep going. In the absence of new money, the entire scam generally collapses. Furthermore, in both scenarios, those who invest first are more likely to get their money back compared to those who enter late. In many cases, investors are convinced to put their money into a poor quality product or one that doesn't exist at all.

To convince investors that they are involved in a legitimate operation, the perpetrators of the scheme will create profit statements and other documents. This will help give the appearance that goods or services are being sold even if they have not. However, at some point, the investors on the top of the pyramid will cash out. When this happens, the scheme will collapse as there are insufficient funds to pay those on the bottom of the pyramid.

Those who engage in a pyramid or Ponzi scheme could spend many years in prison or on probation. It may also be necessary to pay restitution to victims or forfeit property such as homes or cars purchased with illicit funds. An attorney may be able to help someone charged with white-collar crimes obtain a favorable outcome in their case.

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