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What is a Ponzi scheme?

The Ponzi scheme is a type of con or scam that was reportedly first performed by a man named Charles Ponzi in New England back during the 1920s. Ponzi began his scheme by initially purchasing a small amount of international mail coupons that he would use show to investors as part of his pitch to convince people to invest. Ponzi reportedly would tell investors that he could give them a 50 percent return on their investment in as little as 90 days.

Although he initially used the international mail coupons that he had purchased to repay investors, he soon switched to using the funds from new investors to pay the supposed returns to his earlier investors. Ponzi would then find more investors to pay the newer investors, and the cycle would begin again.

Unfortunately, in this type of scheme, there is a constant need for a new flow of money to keep the scheme going. When the influx of money stops, the scheme collapses and more recent investors lose the money that they invested.

Ponzi schemes are illegal and fall under federal jurisdiction for prosecution. They are considered a "white collar crime." Although federal sentencing guidelines call for a prison sentence of between 57 to 71 months, the ultimate decision of how much jail time those who are convicted of operating a Ponzi scheme may vary at the discretion of the judge. As an example, Bernie Madoff, who reportedly ran the largest Ponzi scheme ever in the United States received 150 years for defrauding his investors. In addition to jail time, defendants must also typically pay back restitution to their victims.

Defendants who are accused of white collar crimes such as a Ponzi scheme may benefit from the experience of a Wisconsin criminal attorney to potentially assist with their defense.

Source: U.S. Securities and Exchange Commission, "Ponzi Schemes - What is a Ponzi Scheme?" Aug. 4, 2014

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