Understanding Ponzi scheme allegations

Posted By Law Offices of Jeffrey C. Grass || 14-Sep-2015

While most Texans are familiar with terms like embezzlement, money laundering, insider trading or copyright infringement, not all are well understood. The same is true of Ponzi schemes, named after 1920s businessman Charles Ponzi. This form of white collar crime continues to be alleged in many investment cases today, as one Texas man knows all too well.

CFO.com explains that the man has recently agreed to an out-of-court settlement regarding the allegations made against him. As part of the deal, he admits no guilt but has agreed to repay profits purported to have been received illegally in sums to be determined by a federal judge. The case centered on an attempt to raise money for a technology-based system targeting a reduction in motor vehicle accidents caused by fatigue or tiredness in drivers. Reports indicate that returns as high as 42 percent were promised to some investors and that any payouts were made solely from new investor income.

The U.S. Securities and Exchange Commission explains that the tactic of using new investment funds to pay prior investment returns is common with Ponzi schemes. So too is the promise of rates of return considered to be extraordinarily high. People involved in businesses purported to be fraudulent in this way can find themselves in a state of continuous investor recruitment as this is the only way to pay up on previous commitments.

Differentiating between a Ponzi scheme and a valid business that simply does not succeed can be difficult. This makes it important for businesspeople to clearly understand some of the situations that can appear as a flag and indicator of illegal activity.