Recently suburban Philadelphia businessman, Robert Stinson, Jr., was sentenced to 33 years in prison in federal court for operating a "Ponzi scheme." The scheme allegedly defrauded at least 263 investors for a total amount of 14 million dollars.
Since the Bernie Madoff scandal the term Ponzi scheme has become increasingly popular. But it appears to be a term people use (and misuse) without knowing its true meaning. Recently, any business venture that losses money is being labeled a Ponzi scheme. So what exactly is a Ponzi scheme?
Ponzi schemes get their name from Charles Ponzi, who conned thousands of investors in the1920's with a postage stamp speculation scheme. Ponzi planned on taking advantage of the differences between the value of U.S. and other countries' currencies by buying and selling international mail coupons. He promised investors a 40% return on their money in just ninety days. If this sounds too good to be true, that is because it was. Investors poured millions of dollars into Ponzi's scheme. He apparently only invested $30 of that money into the coupons. Ponzi used new investors' money to pay off his promised rate of return to previous investors. This attracted new investors and caused prior investors to reinvest at higher amounts. In the end, the entire scheme collapsed.
Today, the basic definition of a Ponzi scheme is an illegal business practice in which money from new investors is used to make payments to earlier investors. The scheme operator lies to the earlier investors telling them that the money is a result of the success of the business, not money from new investors. These payments to the earlier investors make the business appear wildly successful and generate interest that lead to more investors, and reinvestment from earlier investors. The operators of the scheme will then keep the rest of the money.
Some Ponzi schemes last for a short time while others can go on for decades. The fact that the highly publicized Madoff scheme lasted almost twenty years was a substantial embarrassment for law enforcement authorities. Post-Madoff security regulators and law enforcement authorities understandably have a heightened sensitivity to any Ponzi scheme allegation. Such heightened sensitivity may lead to prosecutions based on false information and baseless claims.
If you are accused of, or suspect that you have become involved in, any type of fraudulent scheme, even unwittingly, you should immediately contact a lawyer who has experience with fraud investigations and criminal defense. The attorneys at Parkinson, Tarpey & Lloyd are criminal defense attorneys, former prosecutors, and Certified Fraud Examiners (CFE).