Ponzi Schemes

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or from the money paid by subsequent investors rather than from the actual profit earned by the organization. Usually, it involves the promise of unreasonably high returns on an investment. Each new investor provides capital, which in part goes to pay the investor’s interest payments and in part goes into the perpetrators pocket.

Although he did not invent this type of scheme, Charles Ponzi was notorious for perpetrating it on a large scale in the 1920′s. Mr. Ponzi’s investment was an arbitrage scheme. Arbitrage takes advantage of different prices of a product in two or more markets. The investor purchases and sells the same security in two separate markets at the same time at varying price points thus profiting from the difference. In short, it requires the investor to be able to communicate information to a colleague in a different market faster than the financial system. Charles Ponzi’s plan for arbitrage of international reply coupons took in enough money to gain national exposure. Due to his infamy, this particular criminal operation has taken on his name.

Bernard Madoff recently perpetrated this crime on a titanic scale. A local example would be Scott Rothstein, who promised his investors guaranteed payments from labor settlements that his firm negotiated for clients. He told investors that the clients would accept a discounted lump sum and the investor would be paid an annuity.

Ponzi schemes are destined to implode in due time. The scheme requires a constant influx of investors in order to prolong its existence. Eventually, the perpetrator is unable to pay or delay his investors due to the exorbitant amount of money owed in returns to the investments. And once someone looks under the hood, they invariably discover the absence of substance.

And yet, there are numerous false positives in the investment world. Reputations have been ruined simply because of an accusation from a disgruntled former client. Barakat Law is well acquainted with the method to clear your name as well as the need to vigorously defend you from a career-ruining accusation. If you find yourself accused of running a Ponzi scheme, call on the lawyers of Barakat Law to stand by you in your time of need.