Breaking Down Ponzi Schemes: What You Need to Know

Ponzi schemes can cause devastating financial losses for investors. Our Seattle criminal defense attorney discusses what you need to know about Ponzi schemes in this article. Understanding these schemes may help you avoid them. We also discuss the criminal charges you could face if you operate a Ponzi scheme in Washington State.

Understanding Ponzi Schemes: Basic Overview

A Ponzi scheme is a type of investment fraud. Investors are promised substantial returns on their investments with minimal risks. However, there are no investments.

The organizer of the Ponzi scheme uses the money collected from new investors to pay early investors. It gives the illusion that the organizer is investing the funds and earning significant profits. In reality, they are using your money to fool earlier investors while keeping a substantial portion of the money they receive for themselves.

As new investors come on board, the organizer may pay dividends to the next set of investors to keep them happy. The Ponzi scheme depends on convincing new people to invest in the scheme so that there is a continuous cash flow even though there are no investments to generate returns. The investors who join toward the end of the Ponzi scheme tend to lose the most money.

The Inevitable Collapse of a Ponzi Scheme

A Ponzi scheme is destined to fail because of the unstable foundation created by the organizer. Eventually, people stop investing in the scheme. Without a constant influx of cash, the organizer cannot continue the fraud.

Likewise, a Ponzi scheme fails when a large number of investors seek to cash out their returns at the same time. There are insufficient funds to pay the investors, so the scheme fails.

Legal Consequences of Ponzi Schemes

Ponzi schemes are generally prosecuted as a federal crime but can be prosecuted under state fraud statutes. Because the scheme involves fraud, a prosecutor may use several federal fraud statutes to bring criminal charges for a Ponzi scheme. Several other illegal activities involved in Ponzi schemes could result in criminal charges.

Examples of criminal charges for a Ponzi scheme include:

  • Mail fraud
  • Wire fraud
  • Money laundering
  • Bank fraud
  • Conspiracy
  • Securities fraud
  • Racketeering under the RICO Act
  • Theft

The criminal penalties for Ponzi schemes depend on the exact charges and sentencing guidelines. However, the penalty for securities fraud is 25 years in federal prison and a fine. Racketeering charges result in 20 years in prison and a fine of $25,000 for each count. Mail fraud could result in 20 years in prison and a fine of up to $250,000 for each count.

In addition to prison terms and fines, the court may also order you to pay restitution to the victims for their financial losses. You could be required to forfeit assets acquired through the scheme and banned from participating in securities trading.

Are You Being Investigated for a Ponzi Scheme in Washington State?

The penalties for operating a Ponzi scheme are harsh. If you believe you could be the target of an investigation for fraud, contact Seattle criminal defense attorney Jennifer Horwitz. The sooner you have legal representation, the better for your defense. Talking to law enforcement agents without an attorney could limit your defense options.