What Is a Ponzi Scheme?

Financial records showing a Ponzi scheme.

Ponzi schemes have gotten more attention over the past few years in the wake of the Bernie Madoff case. Madoff was charged and convicted with defrauding investors out of billions of dollars over the course of a decade in his Ponzi scheme. The federal government has amped up its prosecution of defendants accused of involvement in Ponzi schemes. 

Ponzi scheme involvement can mean facing several charges for federal crimes and also civil actions. Some of the most commonly charged offenses with this type of scheme include mail fraud, securities fraud, and wire fraud.

What Does a Ponzi Scheme Involve?

A Ponzi scheme involves defrauding investors by promising high returns on investment with little risk regardless of market conditions. Operators focus on recruiting new investors as this is integral to the scheme. The new investor money is used to pay the returns for the older investors so it appears as though the investment is gaining in value, but this is really just part of the illusion.

The scheme depends on a constant flow of new investor money and, when new investors stop coming, the scheme usually quickly falls apart. Red flags for a Ponzi scheme tend to include the fact that the investments have not been registered with the Securities and Exchange Commission (SEC). Also, Ponzi scheme operators often tell investors that the investment strategies being utilized are too complex to explain or must remain a secret to protect the investments. Investors are often prevented from seeing official paperwork relating to their investment and have difficulties removing their investment money.

Ponzi schemes usually involve the violation of multiple federal laws. Those participating in the operation of a Ponzi scheme often face charges such as wire fraud or mail fraud. This applies if the government suspects that you used the postal service or another interstate mail carrier, wire, radio, or television in furtherance of the scheme. Those allegedly involved may also face charges for securities and commodities fraud.

With securities and commodities fraud, misrepresentations or false promises are made in order to get money or property in connection with the sale of a commodity to be delivered in the future, an option on a commodity, or any securities that are registered or required to file reports pursuant to the Securities and Exchange Act of 1934.

The Consequences

Convictions for crimes associated with running a Ponzi scheme come with devastatingly severe sentences. Bernie Madoff, convicted at age 70, was sentenced to 150 years in prison. Since the high profile Bernie Madoff scandal, prosecutors have consistently taken hardline stances on any potential Ponzi scheme activity. A conviction can not only mean substantial fines and prison time, but you may also be ordered to pay restitution to victims of the schemes.

Criminal Defense Attorney

Even the hint that you may be involved in a Ponzi scheme can ruin your professional reputation. Conviction of fraud crimes because you have been found guilty of running a Ponzi scheme can mean incarceration. It can mean financial ruin. It can mean ruin for your personal and your professional reputation. Skilled criminal defense attorney Ron Herman knows what is at stake in these kinds of high profile federal cases and is prepared to fight for you. Contact Herman Law, P.A. today.