Some criminals never cease to invent new ways to defraud the unwary, but other criminals default to older tactics. One particularly old method of white-collar fraud is the Ponzi scheme. These schemes prey on unsophisticated investors and promise high returns and minimal risk. With several high-profile arrests in recent years, these scheme operators continue to victimize the public even today.
What is a Ponzi Scheme?
Named after its creator, Charles Ponzi, this is a scheme wherein the perpetrator promises high investment returns to an initial pool of investors. Perpetrators may or may not have an actual limited liability company or corporation set up. Some perpetrators will court investors under the auspices of a legitimate company while others will simply market their services as investment gurus. In all cases, the intent is to obtain deposits into a fund that may or may not actually exist.
The perpetrators siphon off the clients’ money, living off the funds earmarked for investment. The scheme operators will often produce false documentation showing high returns to discourage withdrawals. Any withdrawals are paid out in funds obtained from other clients if they are available. The imaginary fund grows as the perpetrator continues to court new investors.
Eventually, the fund reaches a point where the requests for withdrawals will outweigh funds provided by the new investors. Depending upon the perpetrator’s willingness to siphon off funds and his or her ability to recruit new investors, this may take many years. When investors begin demanding withdrawals and the fund is depleted, the remaining investors are left with nothing. Anyone involved in a scheme like this should get professional help. An investment fraud lawyer with experience will be able to help you re-build your life.
What Happens to the Perpetrators?
These schemes are inherently unsustainable. That means that no matter how long a scheme is perpetrated, it will eventually become known. When this happens, the fund’s victims will file a lawsuit against the defendant for fraud. These scheme operators tend to be sophisticated white-collar criminals adept at hiding money, so many of these civil suits will end up as worthless judgments against someone who pleads poverty.
Criminal sanctions are a difficult matter. In order to affect a Ponzi scheme, the perpetrator must commit a wide array of offenses. Securities violations are common and wire fraud is usually necessary to complete this scheme. Mail fraud, embezzlement, and other offenses may be added. These offenses carry stiff statutory penalties if the defendant is convicted and in theory, enough charges could be filed to keep a scheme operator in prison for decades.
Unfortunately for the victims, prosecutors are often willing to strike deals with white-collar criminals. Sophisticated white-collar crimes are notoriously difficult to prove, even in the event of offenses as blatant as operating these schemes. Defendants can claim that the fund became depleted as a result of trading losses instead of outright embezzlement. Proving otherwise, while possible, is challenging. As a result, prosecutors will often focus on a select few charges, which will eventually get plead down. Bernie Madoff may have received 150 years in prison for his Ponzi scheme, but many smaller operators receive a prison sentence of only a few years.
How Does One Avoid Becoming a Victim of a Ponzi Scheme?
The best way to avoid becoming a victim of one of these schemes is to invest with reputable financial institutions only. Before investing with any type of smaller company, thoroughly assess the company’s background. Look into all available public records; a company that technically no longer exists yet is still courting investors should be enough to dissuade any investment. Never listen to friends, colleagues, or relatives who claim to “have a guy” who can invest money.
One of the common factors associated with Ponzi Schemes is that the perpetrators will claim consistent and unusually high returns. If a fund is showing consistent returns over seven or eight percent in a severe economic downturn, the fund may not be legitimate. Some of these scheme operators will vary their claims, producing false statements showing variable returns on investment. Properly diversified funds will fluctuate with the various markets.
Ponzi schemes tend to attract unsophisticated investors. Avoiding becoming a victim requires some knowledge of how financial markets work, a willingness to do research, and a healthy dose of common sense. Highly skilled traders who can genuinely produce large and consistent returns have no need for an ordinary citizen’s retirement fund; they will already have positions at major financial institutions. These scheme operators will often claim to have specialized training or some proprietary algorithm to “beat the market.” Always remember: if it sounds too good to be true, it is.
To bring awareness to all types of investment schemes, Paralegal Kelly Kovacic writes articles to help keep investors familiar. If you are a victim of a Ponzi scheme or another financial scheme an investment fraud lawyer from Page Perry LLC will be able to help you rebuild your life. These lawyers have a national reputation of successfully representing investors who have been scammed.