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How Ponzi schemes work and possible signs of one

| Dec 15, 2020 | White Collar Crimes |

A white collar crime in Michigan consists of embezzlement, perjury, government fraud, larceny, corporate fraud, money laundering, counterfeiting, and securities fraud. Most of these crimes warrant a felony charge under federal law since they often impact international commerce. Ponzi schemes commonly fall qualify as white collar crimes.

Ponzi scheme definition

Named for Charles Ponzi, a Ponzi scheme promises investors high returns with no risk when they contribute to a “portfolio manager.” The scammer makes the investor think he or she will profit from a product or service, but the investor actually gets paid with other investors’ money plus their own investment.

As long as new investors contribute, the scheme has the potential of surviving. Otherwise, the scheme may collapse if it doesn’t get new recruits and if the funds stop growing, making less to be divided evenly.

Red flags

A Ponzi scheme scam commonly promises high returns as much as up to 20% profit with no risk. No investment guarantees a return nor comes without some risk. To make a 20% return to the investor, the seller would need profits of more than 20% since he or she has to profit and pay other investors, which could be difficult to achieve.

If a business says it can’t tell an investor anything about how its business model works to make profits, this lack of information usually indicates a scam. In some cases, the investor may get a vague description or one difficult to understand. An honest seller would not try to hide paperwork and would explain the business in basic terms.

The seller of security investments should also be licensed and the investment registered with the SEC. Ponzi scheme creators commonly do not register their business information.

Most states take white collar crimes seriously because of the financial harm they cause. While penalties vary according to the nature of the crime and the investor’s criminal record, common penalties include restitution, supervised release, jail time, and heavy fines. Anyone accused of white collar crime needs a strong defense.