A pyramid scheme is a simple scam with a tempting promise: high returns with little risk. Like a Ponzi scheme, it generates returns for older investors by acquiring new ones. As long as the scam continues to gain new investors, it delivers returns to the older ones, effectively convincing them of the scheme’s veracity. When new investors stop coming in, however, the pyramid almost inevitably topples.
Pyramid schemes may (and often do) begin as perfectly respectable activities: managed funds or hedge funds, for instance, that sell legitimate stocks, bonds, commodities, or other products which brokers can describe as a sure way to generate high returns. Maybe they purport to include private loan portfolios, structured settlements, tax liens, and other products with historically above-average rates of return; maybe the broker claims to have a proprietary method or strategy whose secret he cannot disclose. Investors buy into the illusion because they indeed seem to gain high returns. Of course, these are not in fact returns: they are the invested funds of new customers.
Given the complex nature of pyramid schemes, the brokers managing them are generally engaging in other forms of misconduct as well: misrepresentation, forgery of fictitious statements, fraud, omission of material facts, negligence, failure to disclose risk, unsuitability, and, of course, breaches of contract and fiduciary duty.
Pyramid schemes are inherently unsustainable and will sooner or later fall apart. New investors stop coming; someone questions the financial statements; however it happens, the money stops flowing and the returns dry up. This generally leads to charges against the perpetrators, incarcerations, and asset seizures by the government. In some cases, there is very little of the original investment remaining for the pyramid scheme’s victims to recover. In other cases, however, victims are well able to recover against the perpetrators or solvent businesses they represented.
If you are or believe you might be the victim of a pyramid scheme, call the securities and investment fraud law firm Fitapelli Kurta at (877) 238-4175 for a free consultation. All cases are taken on contingency: we only get paid if and when you recover money. Time to file your claim may be limited, so we encourage you to avoid delay. Again, you spend no money out of pocket. Call (877) 238-4175 now to speak to an attorney for free.