In Massachusetts, investment fraud can happen in a number of ways. Two of the most prevalent scams are "Pyramid" and "Ponzi " schemes. Sometimes these types of scams are confused with legitimate multi-level marketing ventures.
Whether a program is a legitimate multilevel marketing plan or an illegal pyramid depends principally on: (1) the method by which the products or services are sold and (2) the manner in which participants are compensated. Essentially, if a marketing plan compensates participants for sales by their "enrollees," or "recruits," that plan is multilevel. If a program compensates participants, directly or indirectly, merely for the introduction or enrollment of other participants into the program, it is a pyramid.
Pyramid Scheme
A pyramid scheme is formed when a promoter collects money from a certain number of people and instructs them to collect more money from others. The cycle goes on from there. As the pyramid grows, the number of people needed to sustain the pyramid becomes too large. Some people will fail to send in their money, or to recruit others, and the pyramid collapses. The majority of people end up on the “bottom†of the pyramid and inevitably lose their initial “investment.†They won’t get their money back or earn their promised fortune because no one is beneath them in the pyramid adding new money to the pot.
Ponzi Schemes
A Ponzi scheme is essentially an investment fraud where the operator promises high financial returns or dividends that are not available through traditional investments. Instead of investing victims' funds, the operator pays "dividends" to initial investors using the principle amounts "invested" by subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of "dividends."
Here is a brief overview of how the Commonwealth of Massachusetts combats pyramid and ponzi schemes to protect consumers. See White Collar Crimes, Financial Crimes, Securities Fraud, Wire Fraud and Property Crimes for more information.
| Code Section | |
| Nicknames | multi-level marketing ventures |
| What is Prohibited | Pyramid Scheme: A pyramid sales plan is any scheme, whereby a person pays money or some other financial benefit for the chance or opportunity to receive compensation, regardless of whether he also receives other rights or property. Ponzi Scheme: A swindle in which a quick return, made up of money from new investors, on an initial investment lures the victim into much bigger risks. Generally prosecuted as a federal crime, but can be prosecuted as state-crime under fraud and other state statutes. |
| Type of Crime | Felony or Misdemeanor-- varies on nature of the crime |
| Who Enforces/Prosecutes the Law? | Massachusetts Attorney General, Consumer Protection Division, (617) 727-8400 |
| Punishment | Violators are subject to prison or county jail, probation, fines, restitution to victim, community service, injunction/restraining order, revocation of business license, freezing business assets. |
There are several federal protections that may be available to you. To learn more about federal consumer protection laws, contact the following agencies:
State laws are constantly changing -- please contact a local consumer protection lawyer or a criminal defense attorney who can help you better understand the current laws.
