What is a “Ponzi Scheme?”
The case to define Ponzi schemes was Cunningham v. Brown, 265 U.S. 1 (1924), where Charles Ponzi (the defendant in the case, and the person who the scheme was named after) defrauded thousands of New England investors in the 1920s. The scheme is a type of investment fraud where investors are promised high rates of return with little or no risk involved.
There’s also little or no actual business activity that creates revenue. Instead, the original investors and perpetrators of the fraud are paid off by funds from later investors. As long as there are constantly new investors who are investing enough to pay off previous investors, the scheme works.
It gives the impression that the original investments significantly increase in value over a short period. Once there are too many investors demanding payment, or when it doesn’t attract an adequate number of new investments, the scheme collapses. You could be prosecuted if you are involved with the operation of such a scheme.
If charged in such a scheme, seek legal assistance immediately. These charges are serious — which is why it’s important to seek a lawyer who is familiar with federal charges, particularly a charge that can be as complex as Ponzi schemes. There are attorneys who are learned of the crimes you may be charged with and how to handle the different steps of the litigation process.
Legal Definition: Ponzi Schemes
The federal statutes for Ponzi schemes include 18 U.S.C. Section 3301, which defines a securities’ fraud offense as a violation of 18 USC Section 1348, which includes:
- Defrauding or 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 money or property in connection with the purchase or sale of any commodity for future delivery
Many states also have their own laws to punish those who operate Ponzi schemes.
Three Ponzi scheme presumptions exist:
- Transfers from the debtor in furtherance of the Ponzi scheme are made with fraudulent intent
- The debtor who runs a Ponzi scheme is insolvent
- The “value” is limited to the original investment of the obligation
Elements that have not been established since the prosecution of a Ponzi scheme, usually involve charges for various different crimes that have their own elements.
How Ponzi Schemes Are Detected
Ponzi schemes are detected by looking at the “business” or scheme as a whole. And the Tell-tale signs of said business include:
- Ridiculous returns with little to no risk involved
- Unregistered investments
- Paperwork problems
- Difficulty receiving payments
- Glitzy marketing and sales promotion
- Company not licensed to sell securities in your state
- The directors have been arrested for fraud in the past
- There are investor complaints
Victims can report Ponzi schemes to the FBI and the Securities and Exchange Commission (“SEC”), who will then also investigate the allegations. Victims can also turn to Financial Industry Regulatory Authority (“FINRA”) and the North American Securities Administrators Association (“NASAA”).
Audit reports are likely to be conducted because there are usually false statements made in the annual audit reports in an attempt to cover up the scheme.
Background and asset checks are conducted, the source and use of funds are identified, funds are recovered, and assets are traced to investigate a Ponzi scheme. The Federal Trade Commission (“FTC”) or the Department of Justice (“DOJ”) will investigate and prosecute these charges.
There are also financial investigations where there is intense document review, which includes looking at bank account information, real estate files, and motor vehicle records to understand the movement of money.
Investigations are different than being charged — investigations are to collect information relevant to the allegations, and being charged with a crime means that you’re being accused of the crime, but you’re innocent until proven guilty.
Suspected of Operating a Ponzi Scheme… Now What?
If you’re suspected of operating a Ponzi scheme, you may be questioned by the authorities, and it’s important you don’t discuss anything that may potentially be related to the scheme — you have the right to remain silent.
It’s important that you find a qualified attorney as soon as you think you’re suspected of being involved because they will be able to assist you in all steps of the process, including: investigation, pretrial work, any potential pleas, settlements, and/or trial (what happens for each case varies).
Civil Litigation for Ponzi Schemes
Civil charges include claims such as:
- Breach of fiduciary duty
- Negligent misrepresentation
- Fraudulent transfers
- Aiding and abetting fraud.
What If I Had A Complaint Filed Against Me?
After someone, usually the person who has been negatively impacted by the scheme, files a complaint, you will be expected to provide an answer to that complaint. Then there will be subpoenas for information, which you must provide with due diligence (this means taking reasonable steps to do what you’re legally required to do).
Depositions and Interrogations
Before trial, depositions and interrogatories are taken. Then there’s the trial: it could last a long time. The duration of the trial depends on the evidence and how quickly both parties are able to work.
Because there’s a lot going on, and the law is not simple, it is important you find a lawyer who has handled Ponzi scheme cases and has the ability to take action and help obtain the best possible outcome for you.
Criminal Trial for Ponzi Schemes
Criminal charges include:
- Tax fraud
- Consumer fraud
- Aiding and abetting
- Mail and wire fraud
- Securities fraud
- Securities and commodities fraud.
Questioning and Interrogation
If you are suspected of operating a Ponzi scheme, investigators will conduct questioning. You may put yourself at risk if you give statements without knowing what they will be used for, that is why having attorney representation is essential. An attorney prepares you for questioning, remains there interim, and advises you on possible outcomes of the interrogation.
Grand Jury Indictments
At court, the case could be tried before a grand jury. A grand jury is one of the first steps in a criminal trial, if used, and is when a prosecutor works with a group of jury members (either 6 to 12 for regular court or 16 to 23 in the federal system) to decide whether to bring criminal charges or an indictment against a potential defendant.
Going to Trial
If the prosecutor gets a grand jury indictment, then they can skip demonstrating to the judge there is enough evidence to go to trial, and they can just go to trial. To go to court prepared, you will need an attorney to help gather the evidence and develop the best strategy or defense for your case.
What Happens If You’re Convicted of Operating a Ponzi Scheme?
If you are convicted of operating a Ponzi scheme, you could face up to 20 years in jail, pay up to $5,000,000 in fines, or both depending on how much money was involved and how long the scheme went on for.
On top of this, there are personal repercussions. When you are found guilty of committing a federal crime, it could negatively affect your family, and your reputation could be tarnished. You will also risk financial loss because you will not be able to work and you may have a difficult time finding a job with a federal conviction on your record.
Possible Charges and Defenses in Ponzi Scheme Allegations
Mail or wire fraud.
This is when you use wire, radio, USPS, or television communication in foreign commerce to execute a scheme to defraud or obtain money or property by false or fraudulent means. 18 U.S.C. Section 1343.
For example: if you were to make postcards or a website imitating a non-profit organization seeking donations that you then use for a different purpose, a possible defense is the good faith defense, which is, you lacked any intent actually to defraud.
This is where you false or fraudulent means to obtain any money or property in connection with the purchase or sale of any commodity or option on a commodity for future delivery, or any security of an issuer with a class of securities registered.
18 U.S.C. Section 1348. For example: if a stockbroker disseminated false or misled information in an effort to influence stock prices, a possible defense could be that the stockbroker thought it was true and accurate information.
This is where you turn crime proceeds into seemingly legitimate money or other assets. 18 U.S.C. Section 1956. An example of money laundering is if you make money from illegal gambling. It is considered “dirty” money.
To clean it, you need to make a record that seems legitimate, so you run it through a number of legitimate businesses before you deposit it (like laundry, hence “money laundering”). A defense to this could be duress, which is if you were compelled or coerced to commit the crime and there was no safe way to escape it.
Recent Ponzi Scheme Cases
Case #1: United States vs. Madoff, 2009 U.S. Dist. LEXIS 132713 (S.D.N.Y. June 26, 2009)
Bernie Madoff enacted his Ponzi scheme sometime in the 1990s, and it ended in 2008 when he was arrested. His operation involved investment capital that was unlawfully distributed in a deceptive way to give the impression there were financial gains from investments. His convictions included:
- Securities fraud
- Money laundering
- Wire fraud
- Investment fraud
This case shows you should not conduct unlawful or deceptive conduct when operating a financial institution because there may be a point where you are accused and then convicted of a Ponzi scheme. The impact of this case is that many investors are now wary of their investments, and the government’s knowledge of these schemes is stronger than before.
Case #2: United States vs. Stanford, 630 F. Supp. 2d 751 (S.D. Tex. 2009)
Robert Stanford received convictions for:
- Wire and mail fraud
- Money laundering.
He was sentenced to 110 years in prison for a $7.2 billion Ponzi scheme that ripped off approximately 30,000 investors from 113 countries. His scheme involved the sale of fraudulent high-yielding certificates of deposit through his Stanford International Bank.
This case stands as a warning to those who are operating a Ponzi scheme, and entities such as the bank, or those at risk of being convicted.
Case #3: United States v. Rothstein Rosenfeldt Adler, P.A., 717 F.3d 1205 (11th Cir. 2013)
Scott Rothstein purchased what were mislabeled fabricated “structured settlements.” This is where people in legal settlements sell large settlements for lump sums of cash. The loss of up to billions of dollars was based on whistle-blower and employment discrimination cases.
If you are worried and want to avoid allegations of being involved in a Ponzi scheme, you should take precautionary measures. This would include ensuring that you do not provide any false information, that you are not misleading any investors, and that you are following all laws relevant to running your operations.
It is also important for you to fix any inaccurate information, as long as you are not already under investigation. If this is the case, hiring an attorney to aid you in an internal investigation could be beneficial to help protect against any potential future Ponzi scheme allegations.
First Steps if Audited, Investigated, or Accused of a Ponzi Scheme
One of the first steps you should take if you are accused of running or participating in a Ponzi scheme is to contact an experienced white-collar crime attorney. To avoid further trouble, you should avoid making any incriminating statements and protect confidential information.
It is also beneficial to handle community perception by keeping a positive image within your community, such as by volunteering at events, going to community events, and so on. The most important step is that you must make sure you comply with any legal requirements to avoid any further possible trouble.
Take Action Today!
You should start contacting lawyers to figure out who is the best to represent you and your case as soon as possible. The attorney you decide to retain will help you with everything pre-trial and at trial to ensure you are in the best situation possible, given the evidence and case being brought against you.
It is important to have an attorney involved because they will develop the strongest defense for you, save you precious time, and mitigate risks by taking immediate action and using all available methods to get the best possible outcome for you.