Both pyramid schemes and Ponzi schemes are illegal scams designed to swindle others out of their money. In Montana, pyramid schemes are referred to as "chain distributor schemes." This article provides a brief overview of Montana's chain distributor scheme law and then outlines how pyramid and Ponzi schemes generally operate.
| Code Section | Montana Code section 45-6-319: Chain Distributor Schemes |
| What's Prohibited? | It is unlawful for a person to promote, sell, or encourage participation in any chain distributor scheme. |
| What's a "Chain Distributor Scheme?" Â | A chain distributor scheme is a sales scheme where a person is required to make an investment in order to be granted a license or right to recruit for consideration one or more additional people who are also granted the right (after making an investment) to further perpetuate the chain of people who are granted a right upon that condition. |
| What's a "Person?" | Under this statute, a person means any natural person, corporation, partnership, trust, or other entity. In the case of an entity, the term person includes anyone who effectively controls the entity (including individual officers, directors, and other people in control). |
| Penalties | Punishable by imprisonment for up to one year, and/or a fine of up to $1,000. However, a person convicted of a second offense under this section is punished by imprisonment for up to five years, and/or a fine of up to $5,000. |
How Pyramid Schemes Work
Pyramid schemes start with a recruiter who creates a fraudulent business and entices the first round of new recruits to invest in the business. The investment or fee paid by the first round of new recruits is pocketed by the initial recruiter and gives the new recruits the right to invite the next round of investors to join.
Each round of recruits represents a level on the pyramid and will (theoretically) financially benefit from the fees paid by investors who enter the scheme in the future. The pyramid collapses when the scheme can't attract enough new members to support the pyramid.
How Ponzi Schemes Work
Ponzi schemes function in a very similar way to pyramid schemes, however the key difference between the two is the structure of the scheme. A pyramid scheme requires each new investor to recruit additional members into the scheme, however, in a Ponzi scheme the perpetrator of the scam (or a small group of perpetrators) generally does all of the recruiting. The idea is that the fees paid by new investors will be used to pay old investors and create the illusion of profit.
Additional Resources
State laws change frequently. For case specific information regarding Montana's pyramid and Ponzi scheme laws contact a local consumer protection lawyer or criminal defense attorney.
