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What to Do When You’re Accused of Ponzi Scheming

By Los Angeles Criminal Defense Attorney on March 2, 2022

A Ponzi scheme is a fraudulent investment scam that generates returns for early investors with money that comes from later investors. It is named after Charles Ponzi, an Italian swindler who operated in North America and was arrested in 1920. Ponzi schemes promise investors high rates of return with negligible risk. Eventually, when there are not enough new investors to provide sufficient funds to go around, the scheme unravels.

What Actions Constitute Ponzi Schemes in the Eyes of the Law?

The Securities and Exchange Commission (SEC) has increased aggressive enforcement efforts against individuals and companies suspected of Ponzi scheming, particularly in relation to online exchanges and digital currencies. A Ponzi scheme generates returns for original investors from funds received from new investors, which are treated as profit but are actually capital contributions. Red flags that may warn of a Ponzi scheme include:

  • Little or no risk with high return on investments
  • Consistent returns regardless of market conditions
  • Investments not registered with the SEC
  • Complex or secret investment strategies
  • Official paperwork not made available for clients to view
  • Difficulty removing money or receiving payments

How Do Ponzi Schemes Differ From Pyramid Schemes?

The terms “Ponzi scheme” and “pyramid scheme” are often used interchangeably. Although they are similar and have basic features in common, these are two different types of investment fraud.

  • In a Ponzi scheme, investors give money to the scammer in exchange for returns on their investments. Earlier investors are paid from funds provided by new investors.
  • In a pyramid scheme, the original scammer solicits investors, who in turn solicit other investors, and so on. Investors who join later become part of the scheme, and it continues to generate profit until new investors can no longer be recruited, at which point the scheme fails.

What Types of Evidence Factor Into a Ponzi Scheme Investigation?

Suspected Ponzi schemes are investigated by the SEC, the Federal Trade Commission (FTC), the Federal Bureau of Investigation (FBI), and federal and state attorneys. In an investigation, agencies will perform background and asset checks, identify the source and use of funds, recover funds, and trace assets. Financial investigations may include intense document review to track the movement of the money, including bank account information, motor vehicle records, and real estate files. Investigations are performed to collect evidence. Even with allegations of Ponzi scheming, you are still innocent until proven guilty.

What Are the Penalties for Ponzi Scheming?

If you are accused of operating a Ponzi scheme, you could face both criminal and civil penalties. Depending on the charges, criminal penalties upon conviction may include up to 20 years imprisonment, up to $5 million in fines, or both. Possible criminal charges may include securities fraud, racketeering, mail and wire fraud, consumer fraud, tax fraud, and commodities fraud. In addition, you could be held financially liable in civil court based on claims of negligent misrepresentation, breach of fiduciary duty, fraudulent transfers, aiding and abetting fraud, or other allegations.

What Should You Do If You Have Been Arrested for Operating a Ponzi Scheme?

If you are suspected of Ponzi scheming, you may be questioned in an investigation, indicted before a grand jury, and prosecuted in trial. At every step of criminal proceedings, it is crucial to have an experienced criminal defense attorney by your side. After an arrest for Ponzi scheming, your first step is to speak with a lawyer as soon as possible. Anything you say to law enforcement can and will be used against you.

Contact Werksman Jackson & Quinn LLP at (213) 688-0460. Our Los Angeles criminal defense attorneys are former prosecutors, known for their federal criminal defense work.

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Posted in: Criminal Defense