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 returns to investors using money from newer investors. Though enticing in what they claim, these schemes cost unsuspecting 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 latter 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 often sees Ponzi scheme cases with huge losses from investors that quickly become public, largely due to the large number 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 days. Investors paid Ponzi to the tune of $8 million in just seven months. |
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| 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. |
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| 1993-95: Steven Hoffenberg in New York City | 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. |
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| 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. |
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| 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. |
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| 2008: Bernard Madoff in New York City | Bernard Madoff’s investment firm was the 6th largest market 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 that 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). |
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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.