Ponzi v. Pyramid; A comparison
By: Bill E. Branscum
Copyright 2002

The words “Ponzi” and “Pyramid” are often used interchangeably but, as evidenced by the examples provided, they are different – the principal difference being that a Ponzi scheme has only one “official” promoter.

Otherwise, they have much in common. Both are fraudulent “investment schemes” promising unrealistic returns on investment capital, both typically encourage investors to reinvest their profits, both depend upon new investors to satisfy their obligations to prior investors, both are continually insolvent and both are against the law.

Ponzi Schemes invariably involve a material misrepresentation as to the nature of the investment, but a Pyramid Scheme may not. Those who invested their money with Ponzi Scheme operators like C. Philip Elliot, David Mobley and Charles Ponzi, or Pyramid Scheme promoters like Activator Supply Company, fully believed that these fraudulent promoters had discovered or developed a “system” for making money that generated extraordinary returns on investment.

On the other hand, those who invested in Pyramid Schemes like “chain letters” and the previously referenced Galaxy Program promoted by Prosper International League, Ltd., knew that their profits were derived solely from contributions of subsequent investors.

The victims of a Ponzi Scheme are innocent victims, but the victims of Pyramid Schemes victimize others in that they directly promote the criminal enterprise. They may, or may not, be criminally culpable and/or civilly liable, depending upon their understanding of the system. Those who legitimately believe in an underlying structure that serves to create something of value to consumers (like Activator Supply) are innocent victims, but those who promote programs like chain letters and the Galaxy Program are perpetrating and promoting a crime.

I welcome your comments, questions and suggestions.

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.