Everything You Should Know About Ponzi Schemes

After Bernie Madoff and his historic, highly publicized Ponzi scheme collapsed during the Great Recession of 2008, one would think that the prevalence of such schemes would decrease. There is nothing to indicate that that is the case, however, and those knowledgeable about Ponzi schemes are not surprised. After all, if Madoff could swindle sports team owners, famous actors, U.S. senators, and film legends, it’s clear that almost anyone could be a victim.

How Does a Ponzi Scheme Work?

As with so many fraudulent schemes, a Ponzi scheme begins with the promise of money. A charismatic frontman doesn’t hurt.

The frontman pitches potential “investors” on an exclusive or limited-time offer of tremendous ROI. Fraudsters often go to great lengths to show potential investors the expected ROI on their investment. Ponzi schemers typically concentrate on other individuals in their same social circle or line of work. That’s why Ponzi schemes are often referred to as “affinity fraud."

The big lie here is that the fraudster does not actually invest the money. When original or earlier investors are paid back (or ask for their money back), the fraudster pays them with the “investments” of later investors. Victims who get their money back from the frontman usually get a little bit extra (as interest), provided that everyone who is in on the scheme gets a cut.

Fraudsters carrying out Ponzi schemes often ask victims to help recruit more investors, usually in exchange for greater ROI than they would otherwise get. For this reason, many people confuse Ponzi schemes with pyramid schemes.

Eventually, a Ponzi scheme will collapse under its own weight. That much is inevitable. Two scenarios commonly serve as the beginning of the end for Ponzi schemers:

  • The fraudsters or frontmen are unable to find enough new victims/investors; or

  • Too many earlier investors/victims ask for their money back, leaving the fraudsters too little time to generate new investments.

Cryptocurrency-Focused Ponzi Schemes

Cryptocurrencies like Bitcoin and Ethereum simply offer fraudsters another avenue for Ponzi schemes and other financial crimes. Many consumers are somewhat aware of recent crypto booms but might not understand enough about the subject to discern legitimate investment opportunities from scams. These people are prime targets for Ponzi schemers who use cryptocurrency. The opportunity for fraudsters is compounded by the relatively loose regulations governing crypto transactions.

Conclusion

The SEC and other federal agencies still do everything possible to identify, investigate, and prosecute Ponzi schemers. As suspected fraudsters continue to innovate and use the latest technology to pull off schemes, federal agencies are slowly catching up.

If you can feel the heat, we’re here to help you devise a robust defense strategy. Attorney Barry M. Wax has decades of experience defending high-stakes white collar cases. Contact the firm today for a free initial consultation.