Ponzi and pyramid schemes are in the news. What are they, and how can I protect myself?
Pyramid schemes depend on the recruitment of new participants — the base of the pyramid– in order to deliver a promised return to those who invested first –the top of the pyramid. It doesn’t take long for the scheme to run out of fresh recruits, who are needed to keep up the appearance of profit generation. The pyramid collapses, leaving all but the original “insiders” defrauded. A Ponzi scheme is a type of pyramid that uses money from new investors to pay interest and principal to earlier investors, until the scheme collapses. Warning signs of Ponzi schemes include promises of very large returns within a short period of time (“double your money in 60 days!”), an aggressive recruiting effort by a few satisfied early investors, and claims of a “can’t lose” money-making strategy that others have simply overlooked.
