You may have heard many businesses and organizations referred to as a Ponzi scheme, but what does that really mean? Ponzi schemes are essentially investment programs that are fraudulent and take advantage of investors. While this is obviously wrong, operating or knowingly participating in a Ponzi scheme is also a form of commodities fraud and can lead to serious legal consequences. Both the scheme and the legal proceedings can be complicated, so it’s important to have a lawyer walk you through the details of your case.
In a Ponzi scheme, payments collected from new investors are used to pay off earlier investors, while the organizers of the scheme promise to continue investing and instead generate profits off the money. By paying off early investors, they are able to make the scheme look believable and gain good word of mouth, leading to more investments, which they then divert. A successful Ponzi scheme requires a continuous flow of funds in order to sustain itself. If recruitment stops or most investors cast out, the scheme usually ends.
It is important to note that a Ponzi scheme is different from a pyramid scheme. In a Ponzi scheme, investors are made to believe they will earn returns on their investments; in a pyramid scheme, participants are aware that recruitment is the key to their profit. Ponzi schemes are investment tricks.
Federal Ponzi Scheme Laws
Federal statutes around Ponzi schemes include 18 USC Section 3301, which defines a securities’ fraud offense as a violation of 18 USC Section 1348, which includes the following:
- Defrauding a person in connection with a commodity for future delivery, or any option on a commodity for future delivery
- Obtaining representations through false or fraudulent pretenses
- Promises of money or property in connection with the purchase or sale of any commodity for future delivery
While these are federal laws, some states have additional laws surrounding Ponzi schemes.
Ponzi Scheme Investigations
An investigator may identify a Ponzi scheme on their own, or a victim may report the scheme to the SEC. Once an investigation has begun, the Federal Trade Commission (FTC) and DOJ (Department of Justice) will investigate and prosecute the charges. They may look into assets, including the source and use of funds, trading them to a Ponzi scheme.
Financial investigations can also include an intense review of documents, including bank account information, real estate files, and motor vehicle records which may show the trail of relevant money. The goal is to collect information relevant to the allegations, which could lead to being charged with the crime.
Criminal and Civil Ponzi Scheme Charges
If you have been charged in a crime relating to Ponzi schemes, you will need a skilled lawyer to help navigate the process, from investigation through the end of the trial. Ponzi charges can be civil or criminal in nature.
A civil charge related to a Ponzi scheme may include a breach of fiduciary duty, negligence, negligent misrepresentation, fraudulent transfers, and aiding and abetting fraud. These complaints are usually filed by a person who has been impacted by the scheme, and the person accused must then provide an answer to the complaint. There are a number of procedural steps that need to occur before trial where it is determined if the plaintiff is owed money.
Criminal charges may include: tax fraud, consumer fraud, racketeering, aiding and abetting, mail and wire fraud, securities fraud, or commodities fraud. This will then proceed as a criminal trial.
Penalties for Operating a Ponzi Scheme
If you are convicted on criminal charges related to a Ponzi scheme, penalties can include up to 20 years in prison and up to $5 million in fine, depending on the amount of money involved in the fraud and how long it went on.
In addition to these penalties, there are personal repercussions of a guilty conviction. Your reputation can be tarnished, and you may have trouble with future employment, especially when dealing with money. You may also need to pay restitution out of your own pocket.
To avoid these serious consequences, you will need to show that you are not guilty of the crime in court or reach an agreement that has your charges dropped ahead of trial. A skilled lawyer will be able to help you determine the best options in your case and avoid penalties as much as possible.