Ponzi Scheme: Charges, Penalties & Defense

Ponzi scheme criminal attorney, David J. Kramer

What is a Ponzi scheme?

You may have heard the term Ponzi scheme used interchangeably with the term pyramid scheme. However, they are not the same thing.

Both a Ponzi scheme and pyramid scheme boast high payouts to some of the first investors, which lure later investors who never end up making any profit.

In addition, they both tend to unravel when those running the fraud can’t find enough new investors.

What makes a Ponzi scheme different from a pyramid scheme?

Although both are investment fraud, the key difference between a pyramid scheme and a Ponzi scheme are:

  • A Ponzi scheme requires an investment. No action is required after money is handed over. Investors believe they will gain a return as a result of a legitimate investment.
  • A pyramid scheme offers the opportunity to make the money yourself. In order to earn money, the participant is required to recruit new members.

To litigate Ponzi schemes, the Supreme Court has established that an investment contract must meet a four-point test.

  • Investment of money
  • Expectation of profit
  • Common enterprise
  • Dependent upon a third party

The FTC has created a similar test to identify a pyramid scheme.

  • Participants are required to pay the company.
  • Often this is for the right to sell a service or product.
  • Participants are paid for recruiting others.
  • Compensation is based on recruiting and not on selling services or products.

Examples of Ponzi Schemes

The person this crime is named for, Charles Ponzi, started running a scam after he had an initial success with a postage coupon arbitrage business in 1919.

However, he got greedy when investors flocked to him because of his initial success. The SEC got involved and shut it down in 1920.

Just recently, however, 230 Michigan retirees and investors have been defrauded in a Ponzi scheme involving a company called the Woodbridge Group.

Investors were told they would make a profit off of high-interest loans made to third-party borrowers. The loans were made but to a bunch of fake companies who had no assets and who never paid any interest on the loans.

It was a network of insurance agents who had no licenses, who were selling these fraudulent – and unregistered – securities in Michigan.

Although the owner Robert Shapiro has been arrested and some payments are being made, many of these “investors” will never see much of their money returned.

Penalty for Running a Ponzi Scheme

The federal government may bring many charges against someone found to be running a Ponzi scheme. Additionally, multiple convictions can result in a lengthy prison sentence and hefty fines.

Persons accused of running a Ponzi scheme could be charged with:

  • Mail Fraud – use of the postal service to attempt to run a scam based on false promises or material misrepresentations
  • Wire Fraud – use of wire, radio or televisions for the same
  • Securities & Commodities Fraud – this includes violations of the Securities Exchange Act, the Investment Advisors Act, Investment Company Act, or the Trust Indenture Act. Securities and commodities fraud is using pretenses, promises or misrepresentations to deliver money or property for the sale of a commodity, an option, or security registered under the Securities and Exchange Act.

Government agencies responsible for prosecuting Ponzi schemes might also bring lawsuits against companies and executives who are found guilty of this crime.

In addition, individual states may bring charges as well. In the state of Michigan, all securities are required to be registered and sold by licensed sellers. Investment contracts are considered securities.

Contact Criminal Lawyer David J. Kramer

David J. Kramer, Criminal Attorney

David J. Kramer, Criminal Attorney

In conclusion, there is no such thing as accidentally running a Ponzi scheme.

However, if you are facing charges related to a Ponzi scheme, you can protect your rights. Remain silent and call an experienced criminal defense lawyer right away.

Call today