White Collar Crimes: The Ponzi Scheme

December 24, 2019

White Collar Crimes: The Ponzi Scheme

We’ve all heard the saying, “borrowing from Peter to pay Paul.” But did you know that practice is actually a white-collar crime? Known as a Ponzi scheme, these investment frauds pay the initial investors with funds collected from new investors.

That is, of course, until no new investors sign on to the deal.

This fraudulent activity claims little risks with a great reward–but in reality, it does not pan out. Because they bring in no legitimate earnings, they have to have a continuous stream of money.

It seems not too problematic until your investors start to figure it out and they pull out their funding in mass quantities, leading to the collapse of your enterprise.

It’s important to note that Ponzi schemes are different from pyramid schemes in that Ponzi schemes claim there is another source of revenue whereas a pyramid scheme will tell new investors up front that new money pays for the original investments.

But where did the Ponzi scheme get its name?

The Man

Charles Ponzi was an Italian immigrant with quite a business practice. During the 1920s, Ponzi convinced thousands of people in Boston that wealth was theirs in a few easy steps. Smithsonian Magazine reports that it brought in an estimated $15 million with his quick money scheme.

Understanding The Scheme

According to the U.S. Securities and Exchange Commission, there are warning signs that your business venture may be a Ponzi scheme.

  • Big money, little risk. Investments should have some risk. “Guaranteed” no risk is not likely or probable.
  • Constant returns. Because of market conditions, you should see a rise and fall in returns.
  • Unregistered investments. Ponzi schemes typically are not registered with the Securities and Exchange Commission or with any state regulators for that matter. That registration is critical as it provides investors with access to information about the company’s entire background: management, products, services, finances,etc.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered.
  • Secretive, complex strategies. Investments you can’t understand are not investments you want to be a part of.
  • Account errors. Statements errors for accounts can mean your money isn’t going where promised.
  • Payments. Be suspicious if you don’t receive a payment or can’t cash out because of a so-called promised higher reward.

The Crime

Where does the Ponzi Scheme fit in terms of white-collar crime?

These types of schemes are known as fraud. Most often, fraud involves intentional deceit for a monetary gain.

Famous Cases

In the 21st century, we’ve witnessed numerous business professionals partake in a Ponzi scheme. Some of the most notorious include: Bernard Madoff, who raked in $65 billion in his time; Bitcoin; and Jeff Skilling of Enron Corp.

Contact Us

Have you been charged with a crime due to allegations that you participated in illegal behavior at work or in your business? Or have you been cornered into a business that seems too good to be true? At Mazzoni Karam Petorak & Valvano, we can help make things easier for you. Give us a call to set up a meeting.  We look forward to discussing your concerns.

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