How to Spot a Pyramid Scam and What to Do About It

We talk a lot about Ponzi schemes and how to recognize them before you invest your cash, but we rarely talk about pyramid schemes. Any securities fraud attorney can tell you that, although the signs of a Ponzi scheme and the signs of a pyramid scheme can be similar, there are some specific things you should be watching for if you suspect a pyramid scheme. Although Ponzi schemes and pyramid schemes both try to keep up an air of legitimacy while paying off investors with new investors’ cash, the real difference is in how much work the investor is asked to do. Because of this, there are a few distinct differences in spotting these investment scams.

Here are some of the most common “red flags” of pyramid schemes:

  • You’re asked to pay for training. Very few legitimate investment enterprises would ever ask you to pay for training upfront; even the idea of paying for continuing training is suspicious.
  • You don’t understand the specifics of how the program is supposed to work. If you can’t make sense out of the investment techniques or descriptions of investment software, make sure you ask questions until you’re certain you understand how it works. Many fraudsters will rely on their clients not asking too many questions.
  • You’re asked to promote the program to your family and friends. You should never find yourself promoting investments to your family and friends for the referral benefits in an investment plan. This is one of the most classic signs of a pyramid scheme.
  • You hear a lot about why the program isn’t a pyramid scheme, but you don’t hear much else. If the only information you receive is about how well the program is performing and why it isn’t a pyramid scheme, you might want to start looking over your statements for some hard numbers, real results, and any suspicious activity.