Bernard Madoff, the owner of a multi-billion dollar hedge fund was recently arrested for running an illegal Ponzi scheme. Madoff was a major force on Wall Street. He formerly presided over the NASDAQ Stock Exchange as its Chairman. He also founded Bernard L. Madoff Investment Securities LLC, a market making company.

According to the charges made against him, Madoff is responsible for a scheme that resulted in over 50 billion dollars in losses to the investors that trusted their money with him. That’s five times what Avon, the largest network marketing company, takes in for revenue in a single year.

What is a the Difference between Network Marketing and a Ponzi Scheme?

With these charges made against Madoff, this brings up the question that many network marketing distributors struggle with. What is the difference between a legitimate network marketing operation and a illegitimate Ponzi scheme like the one Madoff operated?

The first difference is a significant one. One is legal and lawful. The other is not. It is perfectly legal to compensate your sales force by paying commissions to multiple people above the person who made the initial point of sale. If this was illegal, all network marketing companies would have been shut down a long time ago.

What is not legal however is to compensate this sales force with earnings received by other distributors who invest in the opportunity with hopes of making money. In order for a network marketing company to be legal, commissions must be paid on the actual sale of a product or service.

What is a Ponzi Scheme?

A Ponzi scheme is any scheme in which you pay out extremely large returns using money from future investors to pay back the initial investors who got involved with the scheme at the beginning. The reason this is illegal is because at some point you will run out of people to invest, and the people who invest last will get stuck and lose all of their money.

This is exactly what Bernard Madoff is alleged to have done. During the tough recent economic times, many investors have been pulling money out of hedge funds. Reportedly, Madoff also experienced this and was struggling to repay all of the investors who were requesting their money back.

The way the scheme supposedly worked is as follows. Madoff used a trading strategy of purchasing stock as well as purchasing options to limit market risk. While you can certainly make money with such a strategy you are bound to lose money as well.

However, despite the nature of the strategy, Madoff’s fund continued to pay out consistent returns on an annual basis. According to an acquaintance of Madoff, many questioned how that strategy could generate those kinds of returns so consistently.

The Network Marketing Business Model

With a legitimate network marketing company, there are no guaranteed returns that are offered. Distributors get started with the opportunity and are offered a certain amount of commission based on the sales they produce individually as well as from the efforts of their team.

The network marketing business model is not inherently a Ponzi scheme. However, be warned, a network marketing company can operate as a Ponzi scheme without being detected initially. Look for warning signs such as unrealistic incomes and commissions not based on the sale of a product that someone not in the business would want.

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