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Ponzi/Pyramid Scheme

Pyramid/Ponzi Scheme Fraud FAQS

It is important as an investor or as an investment scheme operator that you are aware of the nature and characteristics of Ponzi schemes, in order to avoid scams or investigation. The following provides answers to the most common questions surrounding Ponzi investment schemes:

What is a Ponzi scheme?

A Ponzi scheme is a fraudulent investment scheme; a type of pyramid scheme, named after Charles Ponzi, who defrauded millions of pounds in the 1920s by making a false promise of a 40% return on an investment opportunity to countless investors.

A Ponzi scheme is an investment scheme where the operators will attract investors by offering unusually high returns. Returns are generated for older investors through the revenue coming from new investors, rather than from the legitimate profits from the investment itself. The scheme will continue to grow until no more recruits can be found and the whole scheme collapses, with the newest investors losing everything. 

What is a Pyramid scheme?

A Pyramid scheme is similar to a Ponzi scheme, relying on a non-existent financial reality, and promising an inflated rate of return. In a Ponzi scheme, however, the operator will interact with all the investors. In a typical Pyramid scheme, those who recruit additional participants benefit directly, and failure to recruit means failure to get a return on investment. The recruited investors are instructed to recruit new members in order to see a return.

What are the main differences between a Ponzi scheme and a Pyramid scheme?

The Ponzi scheme is seen as a type of Pyramid scheme; both involve paying longer-standing investors with income raised from recruiting new members, instead of actual profits from investing or selling products to the public. There are some essential differences between the two schemes:

  • Pyramid schemes reap high profits by making an initial investment then recruiting members to become distributors of a product. The product is usually either not genuine, or one that can only be sold within the scheme. Ponzi schemes earn high investment returns with little or no risk by simply handing over money from new investors to longer-term investors; the investment typically does not exist.
  • Pyramid schemes must recruit new distributors to receive payments. In Ponzi schemes, there is no recruiting necessary to receive payments.
  • In a Ponzi scheme, the promoter generally acts directly with all participants, however, in a Pyramid scheme, new participants will generally correspond with other recruits.
  • In a Pyramid scheme, new participants are the source of payment, and this is always disclosed to the participant at the outset. In a Ponzi scheme, although income comes from new participants, this is never disclosed to investors.
  • Pyramid schemes will collapse quickly as the market for new participants dries up. It is possible to request more investment from Ponzi scheme investors, which can mean it takes much longer for a Ponzi scheme to collapse.

What is a cryptocurrency Ponzi scheme?

Initial Coin Offerings (ICOs) are now being targeted in a new generation of Ponzi schemes. ICOs are an attractive option as they are not formally regulated by financial authorities, existing in an unregulated ecosystem with very few checks and balances. One of the advantages of running such a scheme is the lack of knowledge surrounding cryptocurrency and ICO ventures generally, and operators can, therefore, use this to their advantage.

What are the “red flags” for prompting the investigation into a potential Ponzi scheme?

Your investment scheme will raise concern if it features any of the following characteristics:

  • A high return on investment is promised with little or no risk involved: as it is the case that every investment carries a degree of risk, this will be viewed suspiciously by the regulating authorities as a tactic to lure unsuspecting investors into a fraudulent scheme.
  • Consistently positive returns records: an investment producing regular, positive returns irrespective of general market conditions.
  • Accounting errors: issues with paperwork may be a sign of fraudulent activity and may prompt an investigation.
  • Complex business strategy: this could be viewed by the regulating authority as suspicious for many reasons, including for the purpose of misleading investors.

What should I do if my business is under investigation for running a Ponzi scheme?

Do not panic. With the right team on your side, you can be assured you will achieve the best possible outcome available to you. Contact our solicitors if you are under investigation. Advice from an expert fraud solicitor at the earliest opportunity is crucial to your defence. At Selachii, our tenacious, commercially-minded solicitors provide expert advice and assistance in all manner of investment fraud matters. We have a proven track record helping creditors and investors recover funds, both in the UK and abroad, with particular expertise in cases involving cryptocurrency fraud.

What should I do if I have fallen victim to a Ponzi scheme?

You should contact an expert investment fraud solicitor without delay – time is of the essence in these cases. We have a proven record of recovering assets from scammers across the world, even in cases where the company which carried out the scam is insolvent. Our international litigation expertise and ability to act fast are crucial strengths in maximising the possibility of a successful outcome, minimising the loss if possible and obtaining speedy restitution.

Contact our Investment Fraud Solicitors London

Selachii is a dynamic litigation and dispute resolution law firm based in Kensington, London. We put the best interests of our clients at the heart of everything we do. We work with both businesses and private individuals, giving them legal advice and support which is unique to them and their situation. Because every case is different, we know you will need a tailor-made solution. We do not believe in simply handing out one-size-fits-all solutions to problems. We will focus on your specific circumstances before working out the best and most cost-effective way of helping you achieve your aims. Contact us today on 020 7792 5649 or via our online contact form.

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