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California Pyramid and Ponzi Scheme Laws

In California, pyramid and Ponzi schemes are considered illegal forms of financial fraud. The words "pyramid" and "Ponzi" are often used interchangeably, but they are different -- the main difference being that a Ponzi scheme only involves one con artist, while pyramid schemes involve a group of people.

What is a Pyramid Scheme?

A pyramid scheme is also known as an "endless chain." It works like this. Someone offers you a quick way to "strike it rich" through their fraudulent business. You invest a certain amount of cash and get others (friends, relatives) to do the same. Your recruits get more people to join, and it continues like a chain letter. The problem is it can't really be "endless" because at some point you won't be able to find anyone else to join. The chain ends. The money stops coming in.

Everyone loses, except the person at the top who has just stolen everyone's money and never invested it. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

For example, Frank Fraudster recruits ten victims to act as his "salespeople" in a cosmetics company. These ten victims pay "Frank" $500 each to sell his products. Frank gets 10 percent. The victims make their money back by enlisting ten new sales people each, taking a portion of their fee and passing on the rest to Frank. This continues as long as the victims are enlisting new sales people. When they run out, the pyramid collapses.

What is a Ponzi Scheme?

A Ponzi scheme is a variation of a pyramid scam, but the difference is Frank Fraudster is only asking you to invest your money, not recruit anyone else.

But instead of paying investors with profits from actual investments, Frank Fraudster pays them with the cash given to him from new investors. When he runs out of new investors, again, everyone loses.

Why isn't this a pyramid scheme? Because investors are unaware of what's happening and don't need to recruit new investors themselves. However, a Ponzi scheme will fail for the same reason as a pyramid scheme.

Common Examples of Ponzi Schemes

California Pyramid And Ponzi Scheme Laws At A Glance

The following table highlights the main provisions of California's pyramid and Ponzi scheme laws ("endless chain" statute).

Code Section

Penal Code Section 319 (prohibiting lottery schemes)

Penal Code Section 327 (prohibiting endless chain schemes)

What is Prohibited? Contriving, preparing, setting up, proposing, or operating any endless chain scheme.
Type of Crime Felony or Misdemeanor -- varies on nature of the crime.
Punishment State prison for 16 months, two or three years or up to one year in county jail, probation, fines, restitution, community service.

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.

Other Agencies that Prosecute Pyramid and Ponzi Schemes

Related Resources For California Pyramid And Ponzi Scheme Laws

Charged With a Crime in California? An Attorney Can Help

If you're facing charges under California pyramid and Ponzi scheme laws, it's important to remember that you're innocent unless the prosecution can prove every element of the charges against you beyond a reasonable doubt. Often times, the weakest point of the prosecution's case is its evidence of criminal intent. The good news for you is that there are expert criminal defense attorneys in California who can exploit the weaknesses in the prosecution's evidence and advocate on your behalf. 

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