Pyramid schemes crime

Clever-minded people are always thinking up new ways to swindle others out of their hard-earned cash. Some schemes can appear new and extremely creative that attracts people to entrust their hard-earned money to glib schemers. One successful of these is the pyramid scheme that has found adherents in over 200 years.

How pyramid scheme works

A predictable formula is followed in the pyramid schemes. It starts with one person, who is known as the recruiter. He/she will create a fraudulent business which encourages others to pay a fee to join. The people taken in as members will recruit others to join as well, and pocket the fees. This cycle of recruitment is to continue indefinitely so all who joins the business will continue to receive the recruitment fees of the newbie. The problem in this pyramid lies in the fact that eventually, no one is left to join the pyramid, and those in the scheme will lose their investment.

Multi-Level Marketing Businesses are not pyramid schemes:

Due to the recent popularity of pyramid schemes, many reasonable people will join because the plan similar to a type of legitimate business model called multi-level marketing (MLM). An MLM business starts with one central corporation that creates a product, and then invites other people to pay a fee in exchange for the right to sell its product. Different from a pyramid scheme, multi-level marketing businesses earn by selling credible products as cosmetics, cooking implements, and fashion accessories. They do not rely on an unsustainable stream of new recruits to make their money.

Pyramid scams in Pennsylvania

In Pennsylvania, investment fraud happened in varying ways. Two of the most prevalent scams happening in the state are schemes called, Ponzi and Pyramid.

A pyramid scheme begins with a promoter who collects money from a certain number of people and instructs to do the same to their recruits as the cycle goes on from there. As the pyramid grows, the number of people needed to sustain the pyramid also becomes too large. When some people on line will not be able to send in their money, or unable to recruit new ones, the pyramid collapses. Most of them end up underneath the pyramid will surely lose their first investment. They will not recoup their investments or receive their promised profits since there is no more people under them in the pyramid to contribute more capital to the coffer.

In the Ponzi scheme, the plan is fraudulent as newer contributions are used to pay early members to make it appear that they have major earnings. This is normally not a pyramid scheme but it is like it as a fraud.  The original planner, Charles Ponzi (1882-1949) created this popular scheme that paid early investors with money gained from later investors.

To prohibit these types of frauds, Pennsylvania came up with the following laws:

  1. For the Pyramid Scheme – Pennsylvania’s Unfair Trade Practices and Consumer Protection Law
  2. For the Ponzi scheme – Pennsylvania’s fraud and white collar crime laws

Prosecuting pyramid schemes

In the United States, there is no single federal statute used to file a case against pyramid schemes. However, the Federal Trade Commission continually prosecuted pyramid schemes as forms of deceptive trade practices, or fraud. And every state mandates its own set of legal measures designed to combat pyramid schemes, such as the one by Pennsylvania. Generally, many states demands promoters of pyramid scheme to pay stiffer fines and spend more time in prison if convicted.

In Pa., any pyramid scheme that requires an amount of more than $25 as an “investment” are illegal. Penalty for violators includes: incarceration in county jail, probation period, monetary and other forms of restitution to victim, performing community service, issuance of injunction/restraining order, cancellation of business license or freezing of business assets.

Whether you are the victim or the scammer,  contact a qualified criminal lawyer to make sure your rights are protected.

Back to Top