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What is a Ponzi scheme?

| Mar 16, 2017 | Firm News, White Collar Crimes |

You may have heard the old cliché, “if a deal seems too good to be true, it probably is.” Such is the case with Ponzi schemes. A Ponzi scheme is commonly known as a pyramid scheme. It involves intentionally scamming investors into believing they will make a profit. The issue is that the profit of an early investor comes at the expense of a later investor who will not receive a return on his or her investment.

The formula for pyramid schemes is simple. A recruiter creates a phony business and seeks investors for this “business.” The person then seeks additional recruiters, each of whom will pay a fee to join. Profits from early recruiters are paid with investments from later recruiters. The problem is that recruiting is not infinite, so those who are unable to bring in recruits will never receive a return on their own investment that was paid to the previous recruiter.

These types of schemes have been going on for centuries and still exist today due to their similarity to the multi-level marking business model. The difference between the two is that in multi-level marketing, each “recruiter” is really a salesperson selling a product and recruiting additional salespeople to sell the products, earning a commission on each of the salespeople they are able to bring in. Unlike a Ponzi scheme, profits are generated by sales, not going into a blind pool to be consumed by earlier investors.

White collar crimes such as fraud and Ponzi schemes are taken very seriously in Louisiana and throughout the United States. Those accused of such crimes could face very serious financial penalties as well as substantial jail time if convicted.

Source: FindLaw, “Pyramid Schemes,” Accessed Mar. 14, 2017

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