In Nebraska, both pyramid schemes and Ponzi schemes are illegal. Both are types of investment fraud, where investors are paid out with the fees contributed by the next round of investors, and so forth. These organizations build a house of cards that crashes down when the scheme isn't able to attract enough new investors.
Pyramid and Ponzi schemes shouldn't be confused with legal multilevel marketing businesses (MLMs). The key difference is that MLMs have a real product or service to sell, while the illegal schemes don't primarily earn their profit from selling anything of value.
How Does a Pyramid Scheme Work?
Typically, a pyramid scheme has an initial recruiter who creates a fraudulent business and entices other to join by paying a fee. This initial round of investors then recruits others to join as well and pockets the fees. The notion is that this cycle of recruitment will continue indefinitely.
How Does a Ponzi Scheme Work?
A Ponzi scheme functions much like a pyramid scheme, however, the recruitment process is a bit different. In a Ponzi scheme, the perpetrator recruits the new investors himself, and pays purported returns to existing investors from the funds contributed by the new investors.
Deceptive Trade Practices in Nebraska
In Nebraska, both pyramid and Ponzi schemes are criminalized under the Uniform Deceptive Trade Practices Act. The table below briefly outlines the sections of this act that prohibit pyramid and Ponzi schemes in Nebraska.
| Code Section | Nebraska Revised Statute section 87-302(a)(12) & (13): Deceptive Trade Practices |
| What's Prohibited? |
|
| Definition of "Pyramid Promotional Scheme" | A pyramid promotional scheme is any scheme in which a participant pays for the right to receive compensation from the fees that other participants pay into the scheme, rather than from the sale of goods or services. |
| Definition of "Chain Referral Sales" | Any sales technique, plan, arrangement, or agreement where the seller offers a discount to the buyer as part of a sale in exchange for the buyer providing the seller with the names of prospective buyers, or for helping the seller make another sale. The arrangement is a chain referral scheme if the discount is contingent on an event subsequent to the buyer agreeing to the sale. |
| Penalties | Violators are guilty of a Class II misdemeanor that is punishable by imprisonment for up to six months, and/or a fine of up to $1,000. |
Sale or Lease Agreements Formed from a Pyramid Scheme
If a buyer or lessee is induced by a deceptive trade practice to enter into a sales agreement, is the agreement enforceable? No, it isn't. In Nebraska, sale or lease agreements that were entered as the result of a pyramid scheme may be rescinded by the buyer or lessee. The victimized party may rescind the agreement or retain the merchandise delivered and the benefit of any services performed without any obligation to pay for them.
Additional Resources
State laws change frequently. For case specific information regarding Nebraska's pyramid and Ponzi scheme laws contact a local consumer protection lawyer or a criminal defense attorney.
