What is a Ponzi Scheme? Federal Attorney Explains Ponzi Schemes Under Financial Fraud Litigation

In the photo a woman and man are shaking hands over a table, making a business deal in South Florida, unknown to the woman that she has actually just invested in a Ponzi scheme

What is a Ponzi Scheme?

A Ponzi scheme is a federal fraudulent act that involves a schemer using payments made by new investors to pay for the previous investors.

It is similar to a pyramid scheme in the way that the schemer will eventually run out of new investors who will be used to pay for the previous. 

An investment advisor, “companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments,” according to James Chen.


Red Flags that might indicate a Ponzi Scheme:

  • Overly consistent returns.
  • Little to no risk for high returns.
  • Clients facing difficulty removing their money.
  • An unlicensed seller.
  • Secretive and difficult to interpret strategies.

Crimes Committed by Ponzi Schemes

Ponzi schemes include several forms of financial fraud and federal crimes. This includes commodities, lottery, federal mail fraud, real estate, federal securities fraud, and federal wire fraud. In addition, tax evasion can be charged alongside the various types of crimes. Ponzi schemes can also result in capital theft. 


How did the name “Ponzi Scheme” originate?

The name of the Ponzi scheme originated from Charles Ponzi, an investor in the 1920s. 

Originally, the first few acts of Ponzi schemes were recorded in Germany during the 1800s. However, Ponzi’s scheme was the first in the United States and the first of it’s kind to be charged by federal government authorities.

Ponzi promised consistent returns from international reply coupons in 1919 in his scheme.  The coupons were exchanged for stamps, and the stamps were sold at a high price. This is arbitrage. Ponzi’s actions became illegal when he failed to invest the money, and instead used it to pay off several investors.


Biggest Ponzi Schemes from the 20th & 21st Century

Federal Penalties for Ponzi Schemes IF convicted

Anyone who is involved and committed a Ponzi scheme can face federal charges, fines, and retribution. 

Typically, financial services in the industry, businessmen, and hedge fund managers operate Ponzi type schemes. The severity and sentencing period are significant as well. 

Depending on the amount stolen, the company of concern, and the number of victims, the period of federal incarceration for conviction of a ponzi scheme can range anywhere from  5 years all the way to 150 years. In addition to prison time, restitution and fines can amount to millions of dollars. 

As Ponzi schemes are held at a consequential degree, terminal illnesses and family deaths are not enough to pardon or release the guilty and convicted. 

What Should You Do If You Become a Victim of a Ponzi Scheme?

Majority of Ponzi Scheme victims include the elderly and charity organizations. 

Nonetheless, if you become a victim of a Ponzi scheme, you should:

  1. Not contact your broker, 
  2. gather any and all relevant records, and 
  3. call a lawyer that practices security fraud 

Security fraud lawyers will handle your claim in an arbitration. 

Arbitrations are private, and it occurs when two or more individuals dispute the facts of the case (i.e. evidence & hearings) until coming to a final resolution.

Into the bargain, victims can also sue, but their best option would be to sue the third-party, not the actual person facing charges. For example, the company that the schemer was working for such as the supervising brokerage firm or a third party.


Facing Federal Criminal Charges? Rossen Law Firm Offers Free Federal Defense Consultation in South Florida 

We offer Free Consultations (which we call Strategy Sessions) to anyone facing a federal criminal allegation in South Florida.


We go above and beyond a free consultation by offering a free strategy session in which we listen to your whole story and learn everything we can about your case and let you know how we’d get to work to defend you and what kind of strategy we’d employ to protect your future - you learn all this before you ever pay Rossen Law Firm a single penny.


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