Guide to Ponzi schemes
A Ponzi scheme as determined via criminal law is a form of alleged investment fraud that involves paying money contributed initially by new investors to existing investors and claiming that these funds are returns on their investment. Prosecutors may allege that the business never invested money and instead just sought new investors with promises of risk-free high returns. The fraud is that the money is never invested but just used to pay the previous investors.
Ponzi schemes are named after a speculator in the 1920s named Charles Ponzi who promised 50 percent return within three months. He used incoming funds from new investors to pay the 50 percent returns to earlier investors. Since then, the Ponzi scheme has evolved, but prosecutors look for many red flags. These include overly consistent returns, promises of high reward and low risk uncharacteristic of the prevailing market, making unregistered investments, use of unlicensed sellers or securities firms and secretive investment strategies that are overly complex.
In many cases, the main piece of evidence in Ponzi scheme prosecutions is paperwork that doesn't add up. Any statement errors or inconsistencies also end up as evidence. On the other hand, investment firms that provide clear, open views into their processes and provide easy payment structures are generally considered less risky and less prone to Ponzi schemes.
It is important for individuals accused of fraud to remember that an accusation requires proof to stand up in a court of law. By keeping honest books and using sound business practices, an accused individual may stand trial with a clear conscience. A criminal defense lawyer may provide representation for an accused individual in a criminal court of law as well as help plan a defense strategy.
Source: US SEC, "Ponzi Schemes", December 05, 2014