On Aug. 12, 1920, Charles Ponzi was arrested and charged with 86 counts of mail fraud for running a pyramid scheme. Ponzi was using the funds from new investors in his company to pay returns to earlier investors. By doing this, he was able to pocket almost $250,000 per day.
What is a Ponzi scheme?
A Ponzi scheme is a type of investment fraud where returns are paid to existing investors with funds provided by new investors. These types of schemes entice investors with high consistent returns. They are typically presented as no-risk investments.
How is a Ponzi scheme different from a pyramid scheme?
Pyramid schemes are often conducted through "product sales." In this type of fraud, a person is invited to join the team by making a one-time or recurring payment then recruiting other distributors who will do the same.
The more people you recruit, the higher your earning potential becomes since funds from new participants are paid to prior recruits.
Typically, there is not an actual product being sold or, if there is, it is only allowed to be sold to those who become distributors.
What are the consequences of running a Ponzi scheme?
Once a Ponzi scheme has been discovered, the Securities and Exchange Commission will file a lawsuit against the perpetrator. A trustee will be appointed to recover as much money as possible in order to first pay creditors, with any excess then being distributed back to the defrauded investors.
The trustee will first go after the assets of the perpetrator for liquidation. Once that avenue has been exhausted, the trustee will attempt to recover returns paid to investors regardless of whether they had knowledge that they were involved in a Ponzi scheme.
If another related financial institution, such as the perpetrator's bank, suspected fraud but failed to report it, the trustee may consider taking legal action against them as well.
If you have been charged with perpetrating a Ponzi scheme in New York, it is important that you understand your rights in this state. For advice regarding such a matter, contact an attorney experienced with white collar crimes.