Imagine someone tells you about a fast-growing club where if you give a $2,000 gift to one of the current members, you soon would receive $16,000 in legal, tax-free "gifts" from people who join the club after you.

Or how about a great new financial opportunity that could help you get out of debt or improve your lifestyle, where you could earn unusually large returns on your money with little risk because of the financial expertise of the investment manager.

Both are scams, of course.

The terms "Ponzi scheme" and "pyramid scheme" have been thrown around a lot lately, but could you tell a Ponzi or pyramid scheme from a legitimate investment opportunity? Smart, wealthy people and powerful institutions and charities have failed to spot schemes that in retrospect seemed obvious, in repeated examples in South Carolina and around the nation.

Ponzi and pyramid schemes are not the same thing.

In my two examples, the first is a classic pyramid scheme, based on one called the "World of Giving" that I exposed in news reports 11 years ago, resulting in more than 120 attorney general lawsuits and settlements worth more than $900,000.

In pyramid schemes, typically no one person controls the scam, which grows exponentially as people who have octupled their money tell all their friends until the scheme inevitably runs out of new participants and collapses. Each participant in a pyramid scheme is both perpetrator and potential victim, as they give money to earlier participants and then seek to recruit new donors, with the expectation of getting eight times their money back in a very short time.

Pyramid schemes are mathematically certain to collapse because each pyramid splits into two when the person at the top is paid off. It takes eight participants to pay the first person who cashes out, but it takes 64 to pay those eight, then 512 to pay the 64, then 4,096, then 32,768, then 262,144, then 2.1 million. You get the idea.

Pyramid schemes are sometimes described as "gifting clubs" and may be dressed up in religious language about charity, or pitched as a way to get out of debt. They tend to grow quickly because early participants make money and tell their friends and colleagues. But it's ugly when they start to collapse, as they always do, and people pressure acquaintances and co-workers to jump on board the sinking ship.

My second example is a typical Ponzi scheme, like the more than $17 billion fraud run by Wall Street financier Bernard Madoff.

In a Ponzi scheme, a central player -- often a charismatic, well-respected person -- attracts investments from many people by promising them unrealistic returns. Some of the early investors might get paid to establish credibility, but whoever is running the scheme pockets most of the money. This type of scheme gets its name from Charles Ponzi, who in Boston in the early 1920s took in millions of dollars by claiming he could earn huge returns leveraging the international price difference for mail coupons.

Recent Ponzi schemes in South Carolina, all of which resulted in jail time for the operators, include the $82 million "3 Hebrew Boys" scam where Joseph Brunson, Tony Pough and Timothy McQueen recruited investors at churches and military bases, telling them that fabulous returns on foreign currency investments would get them out of debt; the $66 million scheme of former Charleston

Southern University economist Al Parish, with his unlicensed investment pools and unusual art and collectibles; and a $7 million Ponzi run by former Mount Pleasant commodities trader M. Derrick Peninger.

While pyramid schemes tend to flare up and collapse over the course of a year or so, Ponzi schemes can go on for years, or decades, only coming to light when enough investors demand their money and learn that it was spent on yachts or garden gnome collections or whatever.

Ponzi scheme investors usually are left to fight over the assets of the perpetrator, often receiving back pennies on the dollar. Pyramid scheme participants may be treated as a victim or a perpetrator, depending on whether they made or lost money.

The Federal Trade Commission says organizers of pyramid schemes often try to disguise their ruses as "multilevel marketing" businesses. There are legitimate multilevel sales companies. But those that pay commissions for recruiting new participants are actually illegal pyramid schemes, the FTC says. Some of the commission's tips on telling the difference:

Basic tips from the North American Securities Administrators Association:

Go to www.sec.gov/answers/ponzi.htm for more on Ponzi schemes.

Republican presidential candidate Rick Perry has called Social Security a Ponzi scheme, as have many columnists in the opinion pages of The Post and Courier over the past 15 years.

They appear to be confusing a Ponzi scheme, where one or several scammers defraud many investors, with a pyramid scheme, where early participants receive large payouts from an ever-growing number of contributors.

The idea that Social Security is a pyramid scheme comes from the fact that payroll taxes paid by younger workers directly finance payments to a growing number of retirees, most of whom will collect far more than they contributed.

And without changes, there's no dispute the system eventually would not have enough money coming in to pay full benefits, due to changing demographics and longer lives.

But Social Security does not depend on a mathematically impossible exponential growth in participants, as all pyramid schemes do.

In a 2009 study, Social Security said, "There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both, money from later participants goes to pay the benefits of earlier participants," but that, "there is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme."

Read the full report at www.ssa.gov/history/ponzi.htm.