Ponzi Schemes might best be described as the white-collar crime version of musical chairs. At some point, the music stops, and someone's left with nothing.
Ponzi schemes can be complicated. They also may not be immediately noticed because early investors tend to get their investment back and a return.
Those convicted of Ponzi schemes may face restitution fees in the millions of dollars as well as long prison sentences. They can undermine someone's reputation and may limit a person's ability to work in certain careers and industries. Being accused of running a Ponzi scheme suggests that someone is untrustworthy.
If you're facing criminal charges related to a Ponzi scheme, you need a strong defense. The accusation of this type of financial crime can have consequences far beyond criminal charges. The LLF Law Firm Criminal Defense Team works with individuals defending against state and federal embezzlement charges. Call us at 888-535-3686 or fill out our online form.
What is a Ponzi Scheme?
In a Ponzi scheme, an individual recruits an initial group of people with promises of financial benefits, such as a high return on an investment. Instead of investing the money, the individual uses newer investors' capital to pay off earlier investors. They also take a cut of the investments for themselves.
Ponzi schemes are often confused with pyramid schemes, and it's not uncommon for the two terms to be used interchangeably. The two are similar, but Pyramid schemes involve recruiting new people to pay previous investors.
Ponzi schemes are also sometimes confused with embezzlement, which involves someone who has temporary custody or control of property but misuses it for personal gain. While embezzlement can involve large sums of money, it generally isn't as complex as a Ponzi scheme.
In Ponzi schemes, early investors often don't realize they're part of a criminal enterprise. These schemes can go on for years without anyone noticing that an investment isn't legitimate.
For a Ponzi scheme to succeed, the key is continuing as long as it receives new influxes of cash. It's when the flow of investments tapers off or slows that the scheme can come crashing down.
Biggest Ponzi Schemes
The largest known Ponzi scheme in U.S. history fell apart as a result of the 2008 recession. Bernie Madoff started as a legitimate investor. By 2001, the SEC had begun to suspect Madoff's investments were not all legal. The firm managed to navigate five audits, and it was only the 2008 financial crisis that finally collapsed the house of cards.
One of the longest-running, known Ponzi schemes in U.S. history stretched over two decades. Lou Pearlman defrauded investors out of $1 billion and fled the country in 2006. He was located and arrested in 2007 before being convicted in 2008. In pop culture, this case remains well-known because Pearlman was the man behind '90s boy bands including The Backstreet Boys and *NSYNC.
The Pearlman and Madoff cases both highlight how complex and long-running Ponzi schemes can be. Often, the people involved do have legitimate credentials. As the Madoff case demonstrated, even with an audit, a Ponzi scheme may not be detected.
This can make it challenging for those accused of a Ponzi scheme. Charges aren't the same as a conviction, and individuals need to make sure their business and reputation are protected against criminal charges. The LLF Law Firm Criminal Defense Team makes sure our clients' rights are protected throughout the process.
Federal Laws on Ponzi Schemes
The federal government handles the majority of cases related to Ponzi schemes, as these schemes often cross state lines or involve the mail. For Ponzi scheme prosecutions, the laws most often relied on at the federal level focus on mail fraud and wire fraud. The two statutes are similar in that both rely on a means of communication transmission to commit the act.
To meet the elements for mail or wire fraud, the prosecution must provide evidence of all four elements:
- The defendant voluntarily and intentionally devised or participated in a scheme to defraud
- The defendant had the intent to defraud
- The defendant used Interstate wire communications or the postal service
U.S. law doesn't explicitly define what's meant by scheme to defraud. Courts have refrained from defining these terms other than giving them the broadest possible meaning.
Federal law also refrains from putting a minimum value on mail or wire fraud. Instead, the focus is on the intent to defraud. Some courts have even said a scheme doesn't have to be successful to result in a criminal conviction. In other words, evidence of deception can result in a defendant being found guilty even if their victim didn't suffer a financial loss.
Courts have also found that federal prosecutors meet their burden by proving the existence of a scheme even if they don't prove or establish every detail. In general, a Ponzi scheme is more than an isolated incident or transaction; instead, it is a pattern of conduct.
For Ponzi schemes, other charges may accompany mail or wire fraud. Forgery, for example, often accompanies other white-collar criminal charges. The LLF Law Firm Criminal Defense Team helps clients with a variety of white-collar charges and accompanying allegations.
Pennsylvania Laws on Ponzi Schemes
Similar to federal law, individuals must be knowingly engaged in deceptive practices to be found guilty. At the state level, individuals who operate a Ponzi scheme can be convicted of either a misdemeanor or a felony, depending on the circumstances.
One Pennsylvania law often used in Ponzi schemes is theft by deception. Individuals may be charged with theft by deception when they intentionally obtain money or property by misleading investors. A person is guilty of intentional deception when they:
- Create or reinforce a false impression about a financial interest
- Block someone from accessing information that would change their opinion on a transaction
- Fail to correct a false impression they previously created or reinforced
If convicted, individuals face jail time, fines, and restitution to the victims. A defendant found guilty of operating a Ponzi scheme will generally be banned from securities trading or investment advising.
Individuals charged with a felony face potential jail time of up to 20 years. Individuals charged with a misdemeanor face up to 5 years in jail. In addition to potential jail time and fines, Pennsylvania law includes restitution to victims, plus any punishment.
A court will order restitution regardless of a defendant's current financial resources. The court will set the amount of restitution during sentencing and the payment plan, for example, a lump sum versus monthly.
When, as in Ponzi schemes, there's more than one victim, a court will determine the priority for who is paid first. For individuals on probation or parole who are required to pay restitution, failure to pay that restitution may be considered a violation.
Ponzi schemes carry not only significant criminal penalties but also a heavy financial burden. The LLF Law Firm Criminal Defense Team works with our clients to minimize that burden.
Aiding and Abetting
In 2023, the Pennsylvania Supreme Court added a new cause of action for Ponzi schemes. Individuals who aided and abetted a scheme may also be charged if they had actual knowledge of the scheme.
Affinity Fraud
One of the biggest Ponzi schemes in Pennsylvania history ended with the defendant facing a 10-year prison sentence in 2020. Trading on his membership in the Amish and Mennonite religious communities, an accountant solicited funds for what he claimed was an investment program.
Investors lost approximately $60 million. As part of the sentencing, the federal government required the accountant to pay $59.7 million in restitution and forfeit two pieces of real estate, $22 million in loans receivable, and $1.145 million in payments.
This case is a good example of affinity fraud. In a scheme using affinity fraud, an investor uses their ties to a community or group to solicit funds. They rely on people trusting “one of their own” and exploiting those connections for financial gain.
Allegations of affinity fraud can be especially damaging because they imply that someone's community or group shouldn't trust them. It suggests that someone has exploited personal connections and relationships. If you're facing accusations that suggest you've exploited those close to you, contact the LLF Law Firm Criminal Defense Team.
Protect Your Reputation
Allegations of being involved in a Ponzi scheme can have an enormous impact on a person's life. Especially for those who work in the financial industry, these accusations can have a negative effect on their business and their relationships.
Building a proactive defense is crucial when facing charges related to a Ponzi scheme. Whether charges come from Pennsylvania or the federal government, a conviction carries life-altering consequences. Individuals may be facing not only prison time but also severe financial penalties.
If you're facing criminal charges related to a Ponzi scheme or other white-collar crime, the LLF Law Firm Criminal Defense Team can help. We assist our clients in building strong defenses to help them protect their reputations, their lives, and their careers. Accusations aren't facts, and criminal charges aren't convictions. Call us at 888-535-3686 or fill out our online form.
