The Famous Pyramid Schemes in Modern History

The famous pyramid scheme is an unethical and unreliable investment pitch that depends on guaranteeing irrational profits on fictitious investments.

Pyramid Scheme

The fact that the early investors receive these substantial returns prompts them to endorse the program to others. Returns to investors are paid from fresh capital coming in. When there are no more investors left, the pyramid eventually falls. 

In one type of pyramid scheme, investors charge initiation fees to the investors below them, who then pay them. The higher layers of the pyramid receive a percentage of these fees as well. There is ultimately nobody left to recruit. The pyramid tumbles down.

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Table of Contents

What Is a Pyramid Scheme?

Who is Charles Ponzi

The Biographical Almanac lists “swindler” as Charles Ponzi’s occupation.

Because of his ingenuity in converting a legal business enterprise into a highly lucrative criminal, Ponzi’s name is everlasting. Ponzi, an Italian native, started stealing from his parents and the local priests at a young age. He moved to Canada and then the US, where he committed more misdemeanor offenses and received shorter jail terms. He discovered “arbitrage” in 1919, which is the practice of purchasing an asset in one market and then selling it for more in a different market.

There are many frauds that closely mimic the Scandalous Pyramid Schemes. Everyone appears vulnerable. In 1993, one-sixth of Romanians became victims of a Ponzi scheme. Closer to home, the infamous Foundation for New Era Philanthropy conned sophisticated individuals like I.aurence Rockefeller, a financier, John Whitehead, a former managing partner of the investment firm Goldman Sachs, and William Simon, a former secretary of the Treasury Department, by promising to double and triple the donations wealthy donors wanted to make to charity.

what is pyramid

Why Do People Invest In Pyramid Schemes?

The victim of fraud is given a problem to think about.

The dilemma is deciding whether or not to invest in a risky business and so commit a stupid deed. If social and other situational forces are strong, a person is more prone to act gullibly; conversely, if these pressures are minimal, gullibility is less likely to occur. Gullibility can also refer to fuzzy thinking.

Even those with high IQs can be fairly credulous. Even the most intelligent people occasionally make irrational decisions due to impulse and intuition that are motivated by emotion. Every act of being gullible involves emotion. The investor in a Ponzi scheme is primarily driven to amass more money. This urge is so intense that it prevents the person from using reason and makes them act gullible.

How to Recognize a Pyramid Scheme

Here are some common traits of pyramid scams that one should be aware of:

pyramid scheme

1. Places a Focus on Recruitment

Probabilities are that a program is illegal if it places a lot of emphasis on recruiting new members rather than marketing goods or services.

2. No Genuine Product or Service is Sold

When it comes to schemes that don’t include the selling of any real goods or services, one should exercise extreme caution. Some con artists produce expensive-sounding goods to make it simpler to trick consumers.

3. Guarantees of Large Returns in a Short Period of Time

One should be wary of such scams if they promise a rapid means to gain money in a short period of time. A program can only make quick money if contributions from new members are used to reimburse early funders.

4. There is No Evidence of Retail Sales Revenue

Asking for proof of income should be done before entering any scheme. For instance, they could request to view financial statements, which ought to have been audited by a qualified CPA. The documentation will demonstrate the activities that the organization is engaged in. As a general rule, a scheme should generate more income through the selling of goods or services than through the recruitment of new participants.

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All Pyramid Schemes Collapse

Pyramid schemes are destined to fail since their success depends on their capacity to attract an increasing number of investors.

All pyramid plans will eventually fail because there are a finite amount of people in any given group. Only a select few at the top of the pyramid are the only ones who are wealthy. 

Contrarily, trustworthy multi-level marketing businesses might last a very long period. Since legal multi-level marketing businesses offer high-quality goods or services, participants in these businesses are not at risk of suffering significant losses, even though recruiting new investors is a crucial component of the marketing strategy.

ponzi scheme

How Can You Avoid Being Defrauded?

Obviously, the simplest approach to avoid getting scammed is to ignore any marketing that seems to be a pyramid scheme. Additional advice to help you avoid pyramid schemes is provided below:

  • Determine whether there is a market for the good or service. Exists a comparable good or service on the market? How well does it sell, if so? Avoid the promoters if it appears that they are relying heavily on selling new recruits, distributorships, or substantial start-up inventories. 
  • Discover whether purchasing a product is a requirement for distributorship. Find out if the business will purchase your inventory back before you are stuck with unsold goods. Genuine businesses will purchase your stuff back for at least 80% to 90% of what you paid. Write down all pledges.

If the start-up cost is high, use caution. Some pyramid scams demand that you pay a high fee before you may join as a “distributor.” What do you get for the money you spend? Be wary of claims of easy, rapid, and unrealistically big returns.

Conclusion

A pyramid scheme is a swindle with an unviable business plan as its foundation.

It entails charging people to join a certain type of investment scheme. The new recruits will then need to recruit more members in order to recoup their investment and turn a profit. 

The hiring process goes on until the cycle can no longer continue. The top investors (those who invested first) will have made substantial gains by the time the scam collapses, while the most recent investors will have suffered losses.

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