Last Updated on September 13, 2024
Most people are only aware of a few types of fraud based on things they’ve seen on television. They can imagine a con man fast-talking someone into losing money, someone using identity theft to trick others into trusting them, or someone setting up a pyramid or Ponzi scheme to convince people to “invest” their money with them with promises of wild returns. Though many people are familiar with the idea of investment scams, the actual ins and outs of these schemes are a mystery to most, which is how so many people are fooled into these operations. Some people aren’t even aware that these types of scams are illegal. Here’s what you should know about California laws on Ponzi and pyramid schemes in California.
What is a Ponzi Scheme, and Why is it Called That?
Ponzi schemes are named for Charles Ponzi, who is largely credited with creating the scam. They involve asking people for investments, the returns for which are paid off from new investments. While the first investors get back a good return on their investment, eventually, there is no money left to pay off the new investors, and they are left without any remuneration. The most famous Ponzi scheme was also the largest in history, perpetrated by Bernie Madoff, and cost investors more than $65 million. Madoff was sentenced to 150 years for his scam.
What is a Pyramid Scheme, and How Does it Differ From Multi-Level Marketing?
A pyramid scheme, also called an “endless chain scheme,” is one where participants pay money to participate in a supposed investment opportunity, but their returns depend on how many people they recruit into the program. These scams are intentionally set up similarly to multi-level marketing (MLM) sales programs (like Avon, Scentsy, and LulaRoe), but whereas MLM companies offer legitimate products with a real marketing budget outside of the salespeople, pyramid schemes focus primarily on recruiting new investors because they provide the capital necessary to keep the scam alive.
In some cases, the person heading a pyramid scam will require those under them to sell trivial goods to make it seem more like an actual business, but the bulk of the money changing hands is still done through recruiting, not selling. Sometimes the line between the two programs can be very fine, and many people operating what they believe to be legitimate MLM companies are accused of operating scams.
Ponzi Vs. Pyramid Scheme
One of the biggest differences between a Ponzi scheme and a pyramid scheme is that pyramid scams require those involved to recruit new people. Though Ponzi scams are only successful when investors share their success stories with friends through word-of-mouth, they are not required to tell anyone. This distinction is important because while pyramid scams are typically filed under California Penal Code 327 (PC), which bans endless chain scams, Ponzi schemes may be filed under 327 (PC) or 532 (PC), which prohibits theft by false pretenses —which includes promises of impossibly high returns on investments.
Penalties for Ponzi and Pyramid Schemes
Ponzi and pyramid schemes can be charged on the federal or state level. Both the police and the FBI thoroughly investigate these allegations to provide evidence for prosecutors to use when they press charges. The most common charges filed against those who operate pyramid schemes are 327 (PC), and this penal code can also be used to file charges against some people accused of running Ponzi schemes. This offense can be filed as a misdemeanor or felony, and as a misdemeanor, it is punishable by up to one year in jail, while a felony can carry a sentence of up to three years in prison.
Those accused of Ponzi schemes can also face charges under 532 (PC), which has the same sentencing guidelines.
Like most fraud cases, these scams can also involve mail fraud, wire fraud, securities fraud, tax fraud, theft, and money laundering charges. These charges can carry lengthy prison sentences, so anyone accused of running a pyramid or Ponzi scheme should contact a lawyer as soon as possible.
Anyone who participates in these schemes and recruits new victims knowing they are not legitimate business opportunities may also be charged with fraud and conspiracy charges even if they were technically also scam victims.
If you have been charged with fraud or believe you may be under investigation, please call (760) 643-4050 or (858) 486-3024 to schedule a free initial consultation with top defense attorney Peter M. Liss.
