California residents have likely read stories or watched television news reports that deal with Ponzi schemes, but they may not know how this type of investment fraud is carried out. The perpetrators usually offer investors the opportunity to earn significant returns with little or no risk, but these returns are rarely genuine. Instead, money put into the scheme by new participants is used to pay existing investors until the scheme eventually collapses.
The term Ponzi scheme dates back to the 1920s when a man named Charles Ponzi convinced thousands of investors in New England to speculate in an arbitrage scheme involving postage stamps. Ponzi told his investors that would purchase postal coupons at a discount overseas and then redeem them in the United States for their full face value. Ponzi promised investors a 50 percent return in less than three months. Commercial banks were offering returns of about 5 percent at the time.
Ponzi schemes have a number of tell-tale characteristics. Investments that offer virtually guaranteed returns higher than those available elsewhere may be the clearest indication that the deal may be fraudulent, but investors should also be wary of overly consistent returns. Fraudulent investment opportunities are rarely registered with the Securities and Exchange Commission, and the people behind such them are often unlicensed. Excessively intricate schemes or a lack of transparency should also be scrutinized closely.
The penalties for white-collar crimes like fraud, embezzlement and insider trading can be severe. However, these cases are complex and often difficult for juries to fully understand, and prosecutors may have a difficult time convincing them beyond any reasonable doubt. Experienced criminal defense attorneys could be aware of this, and they may urge prosecutors to reduce or dismiss charges during plea negotiations.
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