The Fraud
Named for Charles Ponzi (that rare exception, an immigrant without a work ethic), a Ponzi scheme is simply a system of robbing Peter to pay Paul. It's a pyramid of investors, the earlier (top) ones being paid off from the investments of the later (bottom) ones. Although these kinds of schemes were conducted long before the illustrious Ponzi was born, and they continue to proliferate today, he raised it to an art form and richly deserved to have this technique bear his name into perpetuity.
He died broke in 1949 in Brazil. But his legacy lives on. Every new day dawns on some innovative scam based on Ponzi's pyramid scheme model. The peak of the pyramid thrives as long as the "downline" foundations don't crumble. But pull out just a few of those bottom rows of stones and fail to replace them--and see how quickly the mighty structure crumbles to dust. The modern day example of a spectacular Ponzi scheme is the Bernard Madoff scam uncovered in late 2008 where enormously wealthy people were conned into this multi billion dollar fraud "by invitation only!"
Many Multi Level Marketing (MLM) operations are pyramid schemes at heart. The difference is that while Ponzi dealt in cash or cash substitutes, MLMs allegedly deal in products. There is a fine line between legitimate MLMs and MLM scams. The courts have held that if a majority of profit comes from product sales to end-users, rather than inventory purchases by new recruits, the MLM is legit.
The Flaw
Once again, it's our old friend gullibility!
The Fix
As always, if it seems too good to be true, run for the exit!