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Ponzi and pyramid schemes are both examples of securities fraud

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Pyramid schemes are often discussed as if they are a thing of the past, which is not the case. Pyramid schemes are often confused with Ponzi schemes. While similar and both can constitute forms of securities fraud, understanding the difference between these two schemes can help victims determine how to pursue possible compensation for their losses.

In New York, pyramid schemes are called chain-distribution schemes, which are illegal under state law. These schemes require investors to recruit even more investors — many schemes request recruiting 10 more people — below them, creating a downline of investors that ultimately looks like a pyramid. When people invest in the scheme, the money goes to investors higher up the chain, meaning those at the bottom never receive returns on their investments. Since continually recruiting more and more people is impossible, these schemes are unsustainable and rarely last long.

Ponzi schemes also rely on bringing in new investors, but they function differently than chain-distribution. Investors in these schemes are led to believe that they will earn returns through their investments, whereas pyramid scheme investors know that their money comes from recruiting. Those in charge of Ponzi schemes do not use one investor’s money to immediately pay another. Instead, money is usually shuffled around and distributed among one or more investors. Ponzi schemes can also last much longer, and may even stretch on for decades.

People choose to invest their money for all kinds of different reasons. Some want to create passive income while others are looking for significant returns. Unfortunately, schemers that are ready to take advantage of New York investors are often hiding in plain sight. Recovering compensation from one of these schemes might not be easy, but speaking with an attorney who is experienced at handling situations involving securities fraud can help.