{"id":352128,"date":"2023-11-24T18:10:07","date_gmt":"2023-11-24T23:10:07","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/criminal\/criminal-charges\/pyramid-schemes.html"},"modified":"2024-11-25T18:09:00","modified_gmt":"2024-11-25T23:09:00","slug":"pyramid-schemes","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/criminal\/criminal-charges\/pyramid-schemes.html","title":{"rendered":"Pyramid Schemes"},"content":{"rendered":"\n
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Pyramid Schemes<\/h1>\n\n
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\n By John Mascolo, Esq.<\/a> | Legally reviewed by John Mascolo, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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A pyramid scheme is a fraudulent investment scheme in which participants benefit financially by recruiting other people instead of selling products or services. The name comes from its pyramid-like scam business structure, where members make money by recruiting new members instead of generating sales by selling goods or services. <\/p>\n\n <\/div>\n\n\n\n

The scheme requires you to pay a fee to join, participate in seminars, or purchase products and other sales materials. It promises a quick way to success without the realistic timeframe required to earn income.<\/p>\n

Many jurisdictions criminalize these operations. California and New York, for example, have banned them through state laws. Before getting involved in any business opportunities, it is best to watch for warning signs that may seem like a deceptive recruitment scheme.<\/p>\n

The business models of pyramid schemes,\u00a0Ponzi schemes<\/a>, and multi-level marketing (MLM) companies are closely related. The first two types of schemes are illegal. MLM businesses may seem shady, but they are technically legal.<\/span><\/p>\n

This article defines pyramid schemes and explains how to distinguish them from legal MLM programs. If you are facing fraud charges related to a pyramid scheme, consider contacting a criminal defense attorney<\/a> near you for legal advice.<\/p>\n

How a\u00a0Pyramid Scheme Works<\/h2>\n

Some schemes take on new and creative forms, but the pyramid scheme<\/a> has remained mostly the same for over 200 years.<\/p>\n

A pyramid scam follows a predictable formula. The first person, the\u00a0recruiter,\u00a0initiates the scam by recruiting others into a business or gifting circle. New members pay a fee to join the business.\u00a0These members then invite other people to buy in, receiving a\u00a0percentage of those joiners’ fees while the recruiter gets a large cut.\u00a0<\/p>\n

The new members are encouraged to recruit more people. As new people enter the business or circle, the scam continues. The recruiter and first members form the top parts of the pyramid and are often the only ones who make money. When new member recruitment slows, the money stops coming in. As a result, the pyramid collapses.<\/p>\n

A pyramid scheme can have a legitimate business at its base. It may be a company that sells an excellent product,\u00a0has an excellent training program,\u00a0and provides great support for its distributors. But,\u00a0if most distributors make their money by\u00a0recruiting new distributors rather than selling products, the business is operating on a pyramid scheme.<\/p>\n

What Is the Difference Between a Pyramid Scheme and a Ponzi Scheme?<\/h2>\n

A pyramid scheme differs from a Ponzi scheme<\/a>. In the 1920s, Charles Ponzi became known for an investment fraud scam in which he bought discounted postal relief coupons from foreign countries. He then redeemed them in the U.S., benefitting from the difference in the two prices. Existing investors thought that Ponzi invested their funds into a viable business, but\u00a0Ponzi instead used new investors’ funds for his profit and to keep earlier investors engaged.\u00a0<\/p>\n

As in a pyramid scheme, when recruitment drops, the scheme fails. Ponzi’s scam took some $20 million from investors before it collapsed. He faced charges of mail fraud and larceny,\u00a0pleading\u00a0guilty to one federal count and spending five\u00a0years in prison.<\/p>\n

He later faced additional state law charges. The largest reported Ponzi scheme to date occurred with the collapse of the New York investment firm of\u00a0Bernie Madoff<\/a>\u00a0in 2008-09.<\/p>\n

Pyramid Schemes: Federal and State Laws<\/b><\/h2>\n

The investigation and prosecution of individuals and companies behind pyramid schemes can occur under both federal and state laws. Although there is no federal statute covering the actions of pyramid scheme frauds, federal investigators can pursue several federal crimes in such situations.<\/p>\n

Each state has its own laws addressing pyramid schemes and similar forms of marketing\u00a0fraud<\/a>,\u00a0including Ponzi schemes. Below are a few examples:<\/p>\n

Arizona<\/h3>\n

Arizona<\/b>: The state\u00a0statute<\/a>\u00a0defines a pyramid promotional scheme as an operation in which participants receive compensation derived from other people’s participation rather than from the sale of goods, services, or intangible property. Arizona makes it a felony to\u00a0establish, operate, advertise, or promote a pyramid promotional scheme.<\/p>\n

Florida<\/h3>\n

Florida’s Deceptive and Unfair Trade Practices Act<\/a>\u00a0defines a pyramid sales scheme as the use of\u00a0a chain referral sales technique to get a consumer to purchase a product or service over $100, where the consumer is promised money or commission to recruit more members.\u00a0Florida law declares the organization of such a practice to be an illegal lottery, which can be a felony offense. Becoming a member or soliciting membership\u00a0in a pyramid scheme\u00a0is punishable\u00a0as\u00a0a first-degree misdemeanor.<\/p>\n

Pennsylvania<\/h3>\n

Under the state’s\u00a0Unfair Trade Practices and Consumer Protection Law<\/a>, Pennsylvania defines a pyramid scheme as:<\/p>\n