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Federal officials remain committed to crackdown on Ponzi schemes

Jul 14, 2016 | Federal Crimes

Thanks to several high-profile cases over the last few years, the Securities and Exchange Commission, Federal Bureau of Investigation and other federal agencies have made cracking down on investment fraud — particularly Ponzi schemes — an ongoing priority.

While this might not seem problematic on its face, the reality is that with these sorts of law enforcement mandates comes the distinct possibility of otherwise innocent people being swept up in dragnets, something that jeopardizes their not just their freedom and their bank accounts, but their professional reputations.

In recognition of this reality, today’s post will spend some time explaining the basics of Ponzi schemes such that people understand how they are actually viewed in the eyes of the law and what typically serves as red flags to federal officials.  

The fundamentals of a Ponzi scheme

At its core, a Ponzi scheme is a type of investment fraud in which existing investors, to whom promises of high returns in exchange for little risk are originally made, are paid using the funds of new investors.

In other words, it involves using the funds of new investors to pay existing investors thereby creating the illusion that the investment is generating returns. This, in turn, keeps the existing investors satisfied and piques the interest of prospective investors.

Given this reliance on a steady stream of incoming investment money and the complete absence of any real returns, a Ponzi scheme will typically start to collapse once there aren’t enough new investors and/or a considerable number of existing investors look to cash out.

As for the name, it derives from Charles Ponzi, the well-known con artist who tricked thousands of New Englanders into a postage stamp speculation scheme roughly 90 years ago, promising 50 percent returns in just 90 days.

We’ll continue this discussion in our next post, examining some of the red flags relied upon by federal officials in identifying Ponzi schemes and how they differ from pyramid schemes.

In the meantime, if you are under investigation or have been charged with any sort of investment fraud, consider speaking with an experienced legal professional who can get to work protecting your rights and your future as soon as possible.


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