How Does a Ponzi Scheme Work and What is The Penalty if Caught?
Federal and state statutes provide both criminal and civil penalties that may apply to various activities that are commonly known as Ponzi Schemes. The various laws governing such activities are numerous and complex requiring the services of an experienced federal defense lawyer.
What Is a Ponzi Scheme?
A Ponzi arrangement is a fraudulent investment scam. Investors are promised high return rates with little or no risk. There is no real underlying source of profit or gain. Rather, return on investment for earlier investors is generated by money invested by later investors.
Initially, a Ponzi schemer attracts new investors by paying the promised high returns. Those high returns entice existing investors to “let it ride” and invest more money. Instead of payouts, the schemer issues false statements of accounts showing the investor’s “earnings”.
Eventually, the scheme collapses when the pool of new investors is exhausted or when too many investors seek to liquidate (cash in) their investments.
Ponzi frauds are named for Charles Ponzi who, in 1920 Boston, promised investors a 50% profit in 45 days and 100% profit in 90 days. He did not originate the scheme which goes back to the 1800s. But he received enormous sums of money as well as notoriety from the Boston and national press.
Bernie Madoff is perhaps the most famous Ponzi fraud because his scheme built a very prominent financial firm on Wall Street. He defrauded many wealthy individuals, some of them celebrities. He was arrested in 2008, convicted of securities fraud, and sentenced to 150 years in prison for losses exceeding $65 million.
What Are the Applicable Laws?
There is no significant statutory law specifically prohibiting Ponzi fraud. The name merely encompasses specific activities for which the schemer can be penalized under multiple statutes. For example, Bernie Madoff conducted a classic Ponzi fraud for which he was convicted of federal securities fraud.
The basic legal transgression of a Ponzi program is fraud which can give rise to criminal penalties as well as civil liabilities. Usually, the criminal charges for a Ponzi fraud will include various illegal activities such as falsified Securities and Exchange Commission filings, wire or mail fraud, conspiracy, perjury, money laundering, and theft.
If convicted of such a cornucopia of violations, a schemer will face lengthy prison sentences. They will also be required to make restitution to their defrauded victims. Since restitution is usually a challenge for most failed schemes the schemer will usually face stiffer prison terms.
The criminal penalty for securities fraud, under 18 U.S.C. §1348, is 25 years in federal prison and a fine. An attempt or conspiracy to commit securities fraud is subject to the same penalties.
However, actual penalties can vary according to the United States Sentencing Guidelines which give the trial judge much discretion.
If the schemer’s activity constitutes other statutory crimes, then the schemer might be subject to penalties for additional counts. For example, each count of mail fraud exposes a schemer to 20 years in prison and a fine of up to $250,000.
A schemer can also face a racketeering charge under the RICO Act. For each racketeering count, the penalty is up to 20 years in prison and a $25,000 fine.
These penalties for multiple counts are cumulative.
If you have reason to worry about running a program that might be construed as fraudulent you should immediately consult an experienced federal defense lawyer. He or she should have extensive practice in federal and state financial crimes.
The Law Office of Patrick R. McKamey, P.A. offers more than 25 years of intensive financial crimes defense experience.