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Pyramid schemes are fraudulent investing plans that promise rich returns, but rarely if ever deliver. Instead, those caught up in the scheme usually lose most if not all of the money they invest.

Pyramid schemes are called that because like pyramids there's very little room at the top and they are supported by a wide base. In the case of the scheme, the fraudsters who organize the plan are the ones at the top sitting on top of their "investors" and their money.

Click here to listen to "Pyramid Schemes"How a Pyramid Scheme Works

In a classic pryramid scheme the organizer, or organizers recruit investors with the promise of large returns and fast turn around on their investment. In addition to providing their money, the investors are expected to recruit other participants into the plan. For example, the first person recruits 10 people who put $100 into the scheme. Those ten are then expect to recruit another 10 people, each of whom will also invest $100. Each new participant is expected to recruit another ten participants. Each 100 new recruit must also pay $100 to the person who recruited him. The recruiters get a profit from all of the money brought into the scheme minus the initial $100 paid to the person who recruited them. The scheme continues until the base of the pyramid is no longer strong enough to support the levels of the pyramid above them. This happens when the scheme runs out of new participants.

Often the individuals who start the scheme will try to make the program look with a legitimate, multi-level, business marketing program. They may even appear to offer a seemingly legitmate product or service. But the real source of the cash are the new participants who are lured into the scheme with promises of quick returns and big profits. The organizers use the upper levels of new participants to pay off those above them on the pyramid in order to keep the plan running, and thus attract even more participants.

Not Enough People in the World!

The basic flaw with pyramid schemes is that mathematically they can't sustain themselves. Even if every person in the world participated the pyramid would run out of new participants between the ninth and tenth rounds of the scheme, and the majority of those who participated would wind up losing money!

Aside from this fatal flaw, pyramid schemes are fradulent because they don't actually create wealth, sell a product, or invest their money. Participants are deceived into thinking that they will get a return by contributing their money, then getting others to do the same. But, as stated above, there just aren't enough people in the world to keep the pyramid from collapsing. It is estimated that 90 percent of people who get involved in pyramid schemes will end up losing money. That's one reason why pyramid schemes are illegal in the United States.

Pyramds in Disguise

Because they are illegal, promoters of pyramid schemes often try and disguise the schemes as legitimate business opportunities. Fraudsters may attempt to fool prospective participants by calling them "Investment Clubs" and call the entry fee a "gift" or a "loan" in order to appear legal. Other pyramid schemes will take the guise of multi-level marketing, and even appear to offer some product or service to sell. Often, however, the product is something without any real value, such as a mailing list of prospective "investors" in the scheme.

No matter what they might be call, or how they may be disguised, if you are promised a nine to ten-fold return on your money, and your expected to recruit others into an operation in order to see a return on your investment there's a chance you may be dealing with a pyramid scheme. As with most fraudulent schemes, if it looks too good to be probably is!