Both state and federal agencies have obligations to oversee investment opportunities.
These regulatory agencies have stepped up their prosecution of individuals suspected of running “Ponzi” and other pyramid schemes in recent years. Understanding what constitutes a Ponzi scheme can help you both avoid trouble and inform your defense if you do find yourself facing charges.
Where did the “Ponzi” name come from?
The name Ponzi refers to a man named Charles Ponzi, a self-professed investment manager from the 1920s, who eventually faced prosecution for defrauding investors out of millions of dollars through an elaborate pyramid scheme.
Pyramid schemes are crimes of deceit. Portfolio managers entice people into bad investments that are never actually meant to turn a profit with the promise of magnificent gains. They then use money from new investors to pay false dividends to the initial investors, and that tends to create rave reviews and “hype” around their whole scheme. Eventually, however, the pool of new investors will dry up — leaving the vast majority of people involved with major losses.
How do investigators detect pyramid schemes?
The regulatory agencies described above spend significant resources trying to identify pyramid schemes. There are certain details that they look for when doing so:
- Lack of registration of securities and brokerages
- Extremely complex investment strategies with very little supporting evidence to explain them
- Instances in which portfolio managers make promises of returns despite there being market fluctuations
- Client statements that don’t add up
Regulators often discover the existence of alleged “Ponzi” schemes when consumers go to cash out and find out that they can’t. Investors then report this to regulators, which gives way to an investigation.
Devising a defense strategy in your investment fraud case
Like most white collar crimes, a conviction for investment fraud carries some pretty harsh penalties. You’ll need to be able to explain your investment opportunity and how foreseeable the associated risks were if you plan to be triumphant in your case.