New York Based Pyramid Schemes Attorneys
Helping Clients Nationwide Expose Pyramid Schemes
Pyramid schemes are investment scams masked as business opportunities that guarantee you income for an act. Usually, the primary promise is that you will receive fabulous returns if you recruit new participants that will also do the same act. The danger with this category of investment scams is they can look very similar to legitimate opportunities. The company may have a well-performing product that you engage with, but eventually, the model will become unsustainable and the pyramid will crash.
Almost all the participants at the bottom of the pyramid will suffer heavy monetary losses. Higher-placed participants may suffer as well. Unfortunately, pyramid schemes are very popular and very costly. The only winners in these types of schemes are the ones that started the scam.
There are a hundred and one legitimate ways that investing will cost you money. What you don’t need, is to lose your hard-earned money through pyramid schemes. That is why our seasoned legal team at Weltz Law is dedicated to helping aggrieved investors recover the compensation they are entitled to.
Pyramid Schemes Explained
The SEC defines pyramid schemes as unsustainable “businesses” that promise a high return over a short period of time that may or may not promote a product or service and have rewards or profit tied to recruiting new participants.
The scheme usually begins with one or a few top-level members that recruit newer members who have to pay upfront costs up the chain. Those same new members will be required to go out and recruit other members who will also pay upfront costs. A portion of these subsequent fees are also kicked up the chain.
For some of these schemes, there will be no product that participants can engage in. Even if it involves a product, these will usually be pointless or bogus. These schemes are often called naked pyramid schemes. For others, there will be actual products or services that are selling very well. Participants will be required to buy some amount of these products themselves, and bring new recruits that will do the same. These are called product-based pyramid schemes.
The problem with these schemes is that the model is very sketchy and unsustainable. While early participants make some money off the scheme, prospective member pools will eventually dry up. This means it will be difficult to create any new funds for the scheme, and before long, the operation will shut down.
By the time everything shuts down, top-level participants will walk away with loads of cash. The majority of members, who will be low-level, will leave both empty-handed, and with serious losses to boot. The reason why these schemes are illegal is the recognition of the founders, right from the beginning, that many will lose. So, they are designed to scam the majority of participants, even if only a few make profits.
Are Ponzi Schemes Different From Pyramid Schemes?
Yes, they are different. Although both schemes thrive on the introduction of new participants and the recognition that the scheme will eventually fail, there are material differences. Ponzi schemes usually lead participants to believe that they are investing in a secure opportunity. They are assured of fixed returns over a period of time, all in exchange for their investment. Also, there is usually no fixed amount required for participation. Members can invest as much as they desire, with an assurance that they will receive a fixed percentage as returns.
The difference for pyramid schemes is that participation is hinged on recruiting new members. Although some registration fee will be required, this is usually fixed and has no guarantee of fixed returns, just that they will be fabulous.
How to Recognize Pyramid Schemes
Pyramid schemes are difficult to recognize because they are often intentionally structured to look like legitimate multi-level marketing businesses. In fact, many businesses that look legitimate have been implicated in allegations of pyramid schemes. And many lawsuits have been filed against high-profile businesses for operating pyramid schemes. So, it can be really difficult to tell if what you are involved in is a scam.
Here are some things to look out for:
- No Genuine Product or Service: People need to be especially careful about schemes that have no demonstrably genuine product. If what is being sold is hard to value, it is more likely that it is a scam.
- Emphasis on Recruiting: The primary focus in a pyramid scheme is on recruitment. Rewards, commissions, and advancement are usually tied to the task of bringing new members. You should be careful if you are encouraged to bring more members in exchange for a higher commission.
- Complex Commission Structure: If you cannot easily understand how commissions work, you may be involved in a scam. Legitimate businesses should clearly show how you can be entitled to a commission and how it relates to what you do.
- Promise of High returns in a Short Period: Any business that promises you high returns in a very short period is suspect. It might mean that money is simply taken from new recruits and paid to old members.
- No Demonstrated Sales Revenue: This is one way you can differentiate between scams and legitimate MLM companies. The latter will ordinarily generate most of their revenue from selling products. If revenue is generated more from recruiting members or if you are not allowed to access the records, be cautious.
- Easy Money or Passive Income: With legitimate businesses, you only receive a reward for your value. If you cannot see a clear nexus between what you do and the fabulous returns you are promised, you should be careful.
Our Legal Team Can Help You Recover Compensation
In deserving circumstances, you may be able to recover whatever amounts you have expended on the scheme. Unfortunately, these schemes can make it very difficult for investors to recover their losses. So, the circumstances in which you can recover compensation are severely limited.
In some cases, third parties can be successfully held liable either for supervising the scheme or offering assistance. In other cases, it’s possible to sue the originators of the scheme and force them to return the proceeds of the scam.
In all events, it is important to get in touch with an attorney as soon as you believe you have been a victim of a pyramid scheme. If you suffered financial harm due to a pyramid scheme, please speak with our legal team so we can help you pursue compensation for your losses.
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Our attorneys have over 30 years of collective experience representing clients in all aspects of securities and commercial litigation.
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