If you hear the phrase “Ponzi scheme,” you may immediately think of Bernie Madoff’s $68 billion 20-year long fraud exposed in 2008. But there have been many high-profile Ponzi schemes since. Just in February 2022, film actor Zachary Horwitz was sentenced to 20 years in prison for his Hollywood-based Ponzi Scheme—a $650 million fraud. Then, later that month, the founder of cryptocurrency BitConnect was indicted for his role in a $2 billion Ponzi scheme. And just a couple of weeks later, a Utah business owner received a 19-year prison sentence for his Ponzi Scheme that defrauded 568 victims of $200 million.
The phrase “Ponzi scheme” is sometimes thrown around to describe any fraud, but that’s not accurate. So let’s take a minute to explain what a Ponzi Scheme is.
Ponzi Schemes, Defined
A Ponzi scheme is a specific type of fraud. The fraudster claims to invest the funds they receive; however, they’re actually taking money from new “investors” and giving it to the earlier “investors.” While the specific bells-and-whistles of Ponzi schemes can differ, federal investigators warn investors that there are common red flags they should look out for:
- Promises of guaranteed high returns, with little risk to the investor
- Overly consistent returns without realistic ebbs and flows
- Investments aren’t registered with the state or federal regulators
- Sellers aren’t licensed or have a background in securities and finance
- The sellers won’t reveal exactly how the investment strategy works
- There are errors in investment materials, statements
- Sellers won’t let you cash out, encouraging you to stay in
If a firm’s machinations don’t seem to match those of a Ponzi scheme, however, there are many other forms of client deception that constitute fraud.
For example, if a broker sends Client A false statements that Client A lost money on an investment, then the broker deducted the amount from Client A’s account and kept it from themselves. That’s not a Ponzi scheme, but it is against the law as straight fraud and theft.
A Ponzi scheme version of that scenario might begin as the broker sends Client A false statements that Client A lost money and deducted the amount from Client A. Then, the broker used Client A’s money to pay Client B—falsely claiming that Client B’s investment was successful.
If a fraudster simply steals all investor money without returning any of the proceeds, than he is simply stealing the money. While a fraudster and a Ponzi schemer may not be materially different to the victims, the SEC will frequently trace the money to discovery how investor proceeds were used and who received money that didn’t belong to them.
If you are concerned your company is defrauding clients, and if you’re wondering if you should become a whistleblower, call the attorneys at Silver Law Group and the Law Firm of David R. Chase. They have years of experience in these matters, and they are here to help. For a free, confidential consultation, email us or call us today at (800)975-4345.