Ponzi Schemes: A Comprehensive Overview

Has anyone ever offered you a strangely vague investment opportunity promising high short-term earnings? There is a chance it could have been a Ponzi scheme--a form of investment fraud that pays return investments using money from newer investors. Though enticing in what they claim, these schemes cost unassuming investors millions. Read on to better understand what these schemes entail and what could follow legally:

  • How Ponzi schemes work and draw in victims, 
  • The Legal History of Ponzi Schemes in the U.S., and
  • How courts approach investment fraud in Maryland.

How Ponzi schemes work

Ponzi schemes start with a promise: low risk, high reward. The con artist--or artists--at the top establishes a front legitimate-looking enough to attract investors; from there, those at the top cycle funds from the top-down (from new-to-old investors) to give the impression of profits.

Of course, there is always a limit. Ponzi schemes rely on a constant influx of new clients. In most cases, once the cycle of funds from new-to-old stops because of a lack of money coming into the scheme, it ends.

You might be wondering why someone would buy into something like this, especially with the relevance of Ponzi schemes reaching all the way back to the 1920s. Consider the following:

  • Multi-million dollar Ponzi schemes use both complexity and secrecy to make details harder to trace. There is an allure to this: the former to assure investors of the system’s continuity, and the later the illusion of honesty. 
  • From the outside, a Ponzi scheme can look like a business. Paying dividends--distributing profits to shareholders--is a legitimate economic decision businesses make while in debt, similar to the flow of cash from investor-to-investor. 
  • Even investors who figure out the scheme are usually hesitant to report the scheme or come forward. Con artists use people who might feel shame for falling into one to their advantage. Also, it might be difficult for a person to produce proof of the scheme considering the complexity and secrecy mentioned earlier. 
  • Many con artists are personable, seemingly trustworthy people who use fancy words and expressions to pull potential investors closer. This disarms the average person’s ability to read through typical red flags they might otherwise see.

It is not hard for someone to fall into a Ponzi scheme, and it can be even harder to get out of one. So, always be sure to know the signs and be wary of a potential scheme.

Though they usually share similar characteristics, Ponzi schemes wear all types of faces. For further reference, let’s take a look at…

The U.S. Legal History of Ponzi Schemes

The United States legal system commonly sees Ponzi scheme cases with huge losses from investors that turn public fast merely due to the large amount of people and money involved. To get an idea of the extent of these schemes, how they worked, and their legal consequences, we have assembled a chart:

The Scheme

The Front

The Consequences

1920: Charles Ponzi in Boston, MA. 

Ponzi’s scheme targeted the US Postal Service and its implementation of pre-purchase postage. He promised to buy and resell international postal-reply coupons with returns of 50% in 45 days and 100% in 90. Investors paid Ponzi to the tune of $8 million in just seven months. 

  • Charges with 86 counts of mail fraud
  • 22 state charges of larceny (dropped to 10)
  • Served over a decade in Massachusetts state prison 
  • Deported back to Italy in October 1934

1980-1990: J. David & Company in San Diego, CA

J. David Dominelli, head of a supposed trading and investing operation, returned $120 million of the $200 million it owed back to investors. The scheme itself attracted a who’s-who of the San Diego upper-class. 

  • Plead guilty to four counts of fraud and income tax evasion 
  • Sentenced to 20 years in prison, served 10½ 
  • Ordered to pay $82 million to defrauded investors

1993-95: Steven Hoffenberg in New York City

This debt collection agency pulled investors in with false financial statements, and circled over $400 million around to early investors and themselves. Up until that point in time, it was the largest uncovered in the country’s history. 

  • Hoffenberg plead guilty to five criminal charges and scamming investors out of over $460 million
  • Sentenced to 20 years in prison, served 18
  • Ordered to pay $462 million to defrauded investors
  • $1 million in fines

1993: Gerald Payne and others in Tampa, FL

Leader of Greater Ministries International Gerald Payne defrauded 18,000 people of a disputed $500 million using Biblical scripture to explain delays in payments. Where they promised their church members double their money back, most of it was never recovered. 

  • Payne, at age 65, was sentenced to 27 years in prison
  • Payne’s wife was sentenced to 12 years and seven months

2003: James Paul Lewis Jr. in Lake Forest, CA

Through his firm “Financial Advisory Consultants,” Lewis raked in around $311 million from investors over a 20-year period running on a by-the-books Ponzi scheme model. Many of his investors were elderly church members.

  • Indicted on five counts of mail fraud and nine counts of money laundering
  • Sentenced to 30 years in prison
  • Ordered to pay $156 million in restitution 

2008: Bernard Madoff in New York City

Bernard Madoff’s investment firm was the 6th largest marker in S&P 500 stocks before a whistleblower proved the gains didn’t add up. The scam involved office workers creating false trading reports and rather than investing money throwing it into a private bank account. Madoff reportedly confessed to his two sons it was “one big lie.” Officials estimate investors lost $18 billion over the course of the nearly-two decade scam (most has been recovered since). 

  • Plead guilty to 11 federal felonies (securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, and more)
  • His brother, head accountant, and financial chief also faced or received sentences from 10-to-125 years in prison 
  • Madoff received the maximum sentence of 150 years in prison
  • Required to forfeit nearly $17.2 billion

 

These are just a handful of the multi-million (and billion) dollar Ponzi schemes in this country’s history--and that is not including international ones. However large-scale and expensive these may seem, all follow a similar formula replicable by the right person--even someone closer to home. 

Maryland’s Approach to Ponzi Schemes

Unsurprisingly, Maryland courts take embezzlement and fraud very seriously.

Like the U.S. Securities and Exchange Commission (SEC), Maryland’s Office of the Attorney General has a Securities Division with the expressed purpose of protecting investors from investment fraud. State “Blue Sky Laws” under the Maryland Securities Act require registration of any person or firm looking to trade stocks and securities. If you suspect foul play on the part of a firm or independent investor, contact the Securities Division immediately.

In recent history, Maryland courts investigated and tried in-state and cross-state con artists for Ponzi schemes that grossed millions of dollars.

Like previous nationwide cases, one of the schemes revolved around convincing victims to invest in church-related expenditures: the heads of the scam allegedly collected $28 million over the course of nearly two years.

Another came from a Maryland financial advisor who defrauded 46 investors of $20 million. In 2019, she was sentenced to 20 years in prison and ordered to pay $14.5 million in restitution. Additionally, one of her partners also pleaded guilty and was ordered to pay $5.7 million in restitution.

Though you might think schemes like the national ones above are commonly found in major metropolitan districts and target the wealthiest-of-wealthy investors, think again.

Luckily, there are resources at your disposal to arm yourself against potential financial ruin. You can learn more about fraud and embezzlement through our site or by contacting an experienced attorney. Be mindful and wary of these schemes are where they might arise; being informed might be the difference between you and your retirement.

If you have any other questions about Ponzi schemes or white-collar crime, please contact our offices for a free consultation.

 

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