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What is a Ponzi Scheme?

Ponzi Schemes have been in the news since November, compliments of Bernard Madoff. Many people have heard the term but not many know exactly what it is. A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or from money that has been paid into the fund by subsequent investors. In this type of scheme, there is very little, if any, actual profit earned.

In order for a Ponzi scheme to be successful, it must offer a return on investment that other, safer, investment types cannot guarantee. This helps the scheme entice new investors whose investments can be used to pay off the “returns” on previous investors. The returns that are paid out are usually either abnormally high or remarkably consistent. In order to keep the scheme going, the investor needs an ever-increasing flow of money from an ever-wider group of investors.

Ponzi schemes are destined to collapse because the earnings that are earned, if there are any, are less than the payments that have to be made each quarter or month. Typically, these schemes are interrupted by legal authorities before they do collapse. They attract suspicion because of the consistency of the payments or the remarkable level of return that is given. Another reason the schemes can be stopped is because they are selling unregistered securities. As more investors are involved, it is more likely that the scheme will come to the attention of authorities.

This class of schemes is named for Charles Ponzi. Mr. Ponzi operated a somewhat successful scheme after emigrating from Italy in 1903. Mr. Ponzi did not come up with the scheme and was certainly not the first person to operate one. His name has been given to the entire class of schemes because of how much money he took in.

Contact an Appleton Criminal Defense Lawyer

If you have been accused of operating a Ponzi scheme or some other type of fraud, contact the Appleton criminal defense lawyers of Hart Powell, S.C., SC at 1-888-565-7597.