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Ponzi schemes remain on the radar of the DOJ

Thanks to recent high profile federal cases, including the prosecutions of Bernie Madoff and Scott Rothstein, more people than ever now know the term Ponzi scheme. However, this knowledge often doesn't extend beyond a baseline understanding that a Ponzi scheme is essentially some manner of white collar crime.

This is perfectly understandable, of course, given the inherent complexity of this topic and the relative infrequency with which this crime has made the headlines in the past few decades. Indeed, the savings and loans crisis was the major financial crime story of the 1980s and much of the 1990s.

In light of this reality, today's post, the first in a series, will start providing some basic background information on Ponzi schemes.

A primer on Ponzi schemes

In general, a Ponzi scheme is a form of investment fraud in which an individual or firm uses funds secured from new investors to pay what are purported to be returns to earlier investors. These new funds, in turn, are solicited from these new investors based on promises made by the individual or firm of high returns with little to no risk (i.e., "getting rich quick").

Indeed, the more of these newly solicited funds that are paid out to existing investors under the guise of promised returns, the more capital the Ponzi scheme can generate as potential investors are encouraged by what they believe to be profits being made legitimately.   

So long as there is a regular flow of new cash from new investors, or a significant number of existing investors don't elect to cash out at the same time, it's possible for Ponzi schemes to go for quite awhile before ultimately collapsing.

As for the name, Ponzi schemes are named after Charles Ponzi, who defrauded a considerable number of people in New England in a scheme involving postage stamp speculation back in the 1920s.

We'll continue this discussion in our next post …

It's important to understand that in light of these aforementioned high-profile Ponzi schemes and other headline-grabbing fraud cases, the federal government has made cracking down on white collar crime a priority. As such, it's absolutely imperative to consider speaking with an experienced legal professional if you are under investigation or have already been charged with any sort of financial crime.    

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Darryl A. Goldberg
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