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What is involved in a Ponzi scheme?

Individuals in New York may have heard of Ponzi schemes. A Ponzi scheme is an illegal investment scheme in which money is generated from new investors. It is named for a man named Charles Ponzi who ran a fraudulent investment scheme in New England in the 1920s related to postage stamp speculation. Ponzi told investors they would get a 50 percent return after 90 days. After first supporting his scheme with international mail coupons, he then turned to using the funds of new investors to pay longer-term investors in the way that Ponzi schemes are known for today.

A Ponzi scheme eventually comes to an end when many investors want to cash out at the same time or it becomes difficult to find new investors, meaning money ceases to be generated. Ponzi schemes are characterized by a few things that they have in common, such as sellers who are unlicensed and investments that are unregistered, returns that show little to no fluctuation, issues with paperwork or receipt of payments, the promise of risk-free, high returns, and strategies that are complex and difficult to understand.

An individual who is suspected of this type of investment fraud may wish to consult an attorney. Investment fraud is considered a white collar crime, and, as a result, investigators may not initially appear aggressive or as though they are pursuing an investigation into something illegal. Therefore, an individual who is approached regarding investment fraud may wish to discuss their next steps with an attorney even if they are not charged with a crime.

If an individual is charged with a crime, an attorney may suggest a number of strategies, including pleading innocent or working out a plea deal. Individuals should keep in mind that each situation is unique, and this blog should not be considered legal advice.

Source: US SEC, "Ponzi Schemes", December 05, 2014

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