A “Ponzi Scheme” was named for one of the most notorious men who ever engaged in the offense, Charles Ponzi. In the 1920s, Ponzi operated a financial investment scam in which he took money from new investors and then used it to pay earlier investors what they thought were profits from their own investment.
While not the inventor of the scheme, Ponzi’s fraudulent operation involved millions of dollars and was worldwide news in its day. The Ponzi Scheme is now the name we use to describe a “pyramid scheme.” This type of financial arrangement commonly requires an ever-growing number of people contributing money to pay people whose money was taken earlier in the scheme. Eventually, the supply of new victims is exhausted and the crime is exposed.
At Tampa’s Stechschulte Nell Law Firm, experienced attorneys understand precisely how these often-complicated financial transactions are conducted and how innocent, well-intentioned people may be recruited into such schemes and unknowingly implicated in crimes.
Defending Ponzi Scheme or pyramid scheme charges frequently requires the criminal defense lawyer to see past the allegations to determine if a legitimate business model could be at its core. Such a business model called “multilevel marketing” is legal. (See Defending Ponzi Schemes below)
Classic Ponzi Schemes
The classic Ponzi Scheme follows the pattern Charles Ponzi and Bernie Madoff demonstrated in their respective crimes. Ponzi’s multimillion-dollar fraud was large in his era.
In 2008, Bernie Madoff confessed that his remarkably successful wealth management fund was just an enormous Ponzi Scheme, the largest in history. Madoff, a highly respected financial icon, evaded detection for decades, all the time getting new investors to feed him and his earlier investors with money received under false pretenses. Madoff never invested any of the billions of dollars he handled.
But variations of the classic scheme are limited only by the imagination of the person launching the scheme.
What Happens If You Are Charged with a Ponzi or Pyramid Scheme
Much depends on whether your charges are being prosecuted in Florida state court or the U.S. District Court. While Florida’s anti-fraud statutes are modeled on federal laws, experienced defense attorneys launch aggressive defenses geared toward the details of the indictment. Jurisdiction matters.
Florida law prohibits illegal Ponzi Schemes and pyramid schemes under several statutes, imposing both criminal and civil penalties:
F.S. 817.034 Fraudulent Practices Involving Communications
- wire fraud,
- mail fraud,
- fraud by use of any radio, electromagnetic, photoelectronic, or photo-optical system.
Engaging in any fraud or scheme to defraud someone of their property can be prosecuted under this statute as “organized fraud.” Potential penalties include significant prison terms for an increasing number of years as the value of the fraud climbs.
- If the fraud involves $50,000 or more, the first-degree felony carries up to 30 years in prison.
- If the value of the fraud is between $20,000 and $50,000, a 15-year prison sentence is possible.
- When valued at less than $20,000, the offender faces up to 5 years in prison.
Significantly, anyone who “communicates” in furtherance of the scheme to defraud can be prosecuted in separate criminal counts of “communications fraud” for every act of communication, even when each such communication involves the same fraudulent scheme.
Every count for which a defendant is convicted (i.e., every act of communication) can result in a separate prison sentence of up to 5 years as a third-degree felony. By this prosecutorial plan, a defendant convicted of communication fraud could receive an aggregate prison sentence of 50 or more years if they communicated with a victim 10 times during the entire scheme.
Federal Ponzi or Pyramid Scheme Law
Whenever any criminal fraud scheme involves the use of interstate mail or wire communications (computer, emails, social media, telephone, texts, etc.), the U.S. Department of Justice can prosecute the defendant with federal wire fraud or mail fraud laws. Under these federal statutes, participating in a Ponzi or pyramid scheme can result in a 20-year prison term and a $250,000 fine for each count.
Lesser Charges for “Pyramid Clubs”
Not every pyramid scheme is a major crime, even though illegal. For example, under Florida statute 849.091, individuals who have no intent to defraud anyone participating in “pyramid clubs.” A pyramid club is one in which a person is asked to pay a relatively small sum, say $150, and is asked to recruit 10 others who each will pay them $150. Each of these 10 will also ask 10 others to join, each paying $150 to the recruiter. The promise is that each participant who gets 10 recruits will get $1,500.
The stream of new recruits eventually runs out, especially for people who can’t sell the idea to friends, and the last to participate lose their money. Because this type of pyramid arrangement could fall apart at any level of the pyramid, those schemes involving more than $100 are deemed to be illegal gambling, each participant in these pyramid clubs faces a first-degree misdemeanor conviction and up to a year in prison.
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Defending Ponzi Schemes and Pyramid Scheme Charges
Many Ponzi schemes and other pyramid schemes are identified by prosecutors for prosecution because they look illegal. But if something of real value is received by the purchaser or investor, experienced financial fraud defense lawyers know that no crime is necessarily committed.
Multi-level marketing is a completely legitimate business model. It involves sales of a product or service to several people recruited to conduct their own sales of the same items. Each recruiter receives a percentage, or commission, from the sales made by those they recruited. At first blush, this seems like an illegal pyramid scheme. But no crime is committed if the intentions are for each participant to receive a value that they understood they would receive.
Only criminal defense attorneys with financial fraud defense experience can best distinguish allegedly illegal Ponzi schemes from a legitimate, though unconventional business. Call Stechschulte Nell for a free case review today; 813-280-1244.