White Collar Crime. Ponzi Schemes - Essay Example

? Ponzi Schemes by William Major Strayer Business Law LEG 100 Mclemore 4 August Ponzi Schemes Ponzi schemes are investment schemes not supported by an underlying business. It is one of the several schemes considered as a white collar crime. In the Ponzi scheme, investors are enticed with bogus investments that supposedly promise from moderate to very high returns at zero or low risks for investors. Essentially, the newer set of investors is made to finance the dividend earnings of earlier investors. Other than this, there is no other income from the investment such that the scheme eventually cracks as not enough investors are generated to support the dividend earnings of earlier investors. Victims lose money and the perpetrator of the ponzi attempts to run away from the scene of the crime. In the United States, there are laws against the ponzi and recovery of assets or some of the assets is possible. Ponzi Schemes According to the National Check Fraud Center (2011) based in South Carolina, the Ponzi scheme is one of the 22 white-collar crimes that schemes. In addition to the white-collar schemes are 22 white-collar crimes. The 22 white-collar crimes include bank fraud, blackmail, bribery, cellular phone fraud, computer fraud, counterfeiting, credit card fraud, currency scheme, embezzlement, environmental scheme, extortion, forgery, health care fraud, insider trading, insurance fraud, investment scheme, kickback, larceny/theft, money laundering, securities fraud, and tax evasion (National Fraud Center, 2011). On the other hand, the white-collar schemes include advanced fee schemes, airport scams, auto repair schemes, check kiting, coupon redemption, directory advertising, fortune telling, gypsies, home improvement, inferior equipment, Jamaican Switch, land fraud, odometer fraud, pigeon drop, police impersonation, ponzi, pyramid, quick change, shell game, utilities impersonation, VCR scam, and West African investment scam (National Fraud Center, 2011). The ponzi scheme is a type of an investment “where the actor solicits investors in a business venture, promising extremely high financial returns or dividends in a very short period of time” (National Fraud Center, 2011). The perpetrator in the ponzi scheme usually promises high returns simultaneous with a claim of zero or little risks on the investment (Securities and Exchange Commission, 2011). In many ponzi schemes, the perpetrator focuses on attracting new money from earlier investors so he can build credibility and entice more victims to make an investment (Securities and Exchange Commission, 2011). In the ponzi scheme, the actor or the criminal does not invest the money but pays dividends from the investments of new investors (National Fraud Center, 2011). As the initial investors are pleased with the payment of dividends, the initial investors bring in new investors from which payments for the dividends of the earlier investors are derived. (National Fraud Center, 2011). The ponzi scheme pays dividends from the investment funds of earlier investors but the scheme surely falls apart when the perpetrator no longer has sufficient investors from which to pay dividends for the earlier investors (National Fraud Center, 2011). When payments to the dividends of earlier investors are no longer possible from the investments of new investors, the perpetrator takes all the money and leaves his or her ponzi area (National Fraud Center, 2011). Ponzi schemes collapse because it is unable to consistently derive money from new investments (Securities and Exchange Commission, 2011). According to the Federal Bureau of Investigation (2011), the ponzi scheme generally falls apart because sufficient investors cannot be found to allow the continuous payments of dividends. The scheme obtained the name from Charles Ponzi of Boston, Massachussetts in the early 1900s who launched a scheme that guaranteed 50 percent profit (Federal Bureau of Investigation, 2011). The promise of 50% returns was only for 90 days (Securities and Exchange Commission, 2011). Thus, the Charles Ponzi case was the first recorded ponzi. Charles Ponzi was able to dupe thousands of residents of New England in his scheme (Securities and Exchange Commission, 2011). Although Charles Ponzi was able to pay his initial investors, the scheme eventually dissolved because he was unable to pay subsequent investors. It must be pointed out that although Ponzi initially bought international coupons, he quickly turned to incoming investments from new investors to support the payment of the dividends of earlier investor (Securities and Exchange Commission, 2011). Thus, it is possible that some of the ponzi schemes may have started as a legitimate investment scheme that was converted into a systematic crime or embezzlement later. Of course, it is also possible that the legitimate activity had been carefully planned, calculated, and designed from the very beginning as a way to give an image of credibility to the ponzi. The Federal Bureau of Investigation (2011) released three advisories so people can avoid being victimized by ponzi schemes. First, avoid schemes that promise extraordinary returns on investments. Second, apply due diligence in selecting investments and check their background. Third, always seek the opinion of disinterested third parties or parties independent and authoritative on the status of possible ponzi scheme perpetrators before making an investment or a decision to invest. Meanwhile, the United States Securities and Exchange Commission reported that they have been checking into ponzi cases each year to prevent new victims (2011). The Securities and Exchange Commission tries to recover assets and emergency actions are executed like asset freeze and temporary restraining order to prevent harm and bring perpetrators to justice (Securities and Exchange, 2011). The punishment for ponzi perpetrators can be severe. For instance, Bernard Madoff is now serving a 150-year sentence after he was found to be orchestrating a ponzi scheme that swindled money from thousands (Securities and Exchange Commission, 2011). Unlike other ponzis, Madoff’s scheme had appeared legitimate because the reports to victims showed moderate but consistently positive returns even when market conditions are bad (Securities and Exchange Commission, 2011). However, what is worrisome in the Madoff case is that the ponzi had existed for several years (Securities and Exchange Commission, 2011). This implies that a ponzi can appear legitimate for some time and operate high profile in the world’s most advanced society. The Madoff ponzi was prosecuted by the SEC around 2008 and was found to have defrauded victims of at last US$ 50 billion (Cash, 2010, p. 329). Table 1 on the next page lists some of the more significant ponzi cases in the United States. According to the NERA Economic Consulting, as of 2009, the SEC has facilitated a US$50 million settlement for the victims in each of the ponzi cases listed on Table 1. Table 1. SEC settlements at least US$50 million in the US Source: NERA Economic Consulting, 2009, p. 2 The Securities and Exchange Commission, in direct contrast with the warnings of the Federal Bureau of Investigation, sees the following as among the warning signs of a ponzi. First, the guarantee of opportunities. Second, the report of overly consistent returns given that investments can go up and down. Finally, the third or probably the most important, an investment scheme that is not registered with the Securities and Exchange Commission has a high risk of being a ponzi or could become a ponzi because of the lack of transparency. According to the Securities and Exchange Commission, registration with the SEC provides investors access to key corporate information on the company’s management, services, products, and finances (2011). In addition to the key advises of the Securities and Exchange Commission, the public is being called upon by the SEC to be alert to secretive and complex strategies (2011). Further, the SEC is asking the public to ignore the excuses that a ponzi suspect gives to avoid transparency and inspection of their SEC registration documents or investment prospectus. In my opinion, it may useful to see the ponzi suspect’s audited financial statements whenever they should logically available. The SEC can be contacted by phone at (800)-752-0330 and additional information can be obtained in their website at www.sec.gov for additional advice on ponzi as well as additional advise vis-a-vis ponzi suspects. According to Vecchio and Laigaie (2009), some of the laws in the United that victims can use against perpetrators of ponzi include the laws on fraud as well as “clawback” suits. According to Vecchio and Laigaie, the clawback suits have the potential to recover assets from perpetrators of ponzi schemes. The legal definition of a ponzi scheme according to a Kentucky Law Journal article is broad enough to prosecute perpetrators. According to Cash (2010, p. 333), a ponzi scheme is “an investment scheme which is not really supported by any underlying business venture.” In my opinion, this legal definition of a ponzi scheme can provide the stick through which victims can hit white collar criminals behind the ponzi. References Cash, J. (2010). When is an equity participant actually a creditor? The effects of In re AFI holding on Ponzi scheme victims and the good faith in defense. Kentucky Law Journal, 98 (2009-2010), 329-354. Federal Bureau of Investigation. (2011). “Ponzi” schemes. Washington: Federal Bureau of Investigation. Available in: http://www.fbi.gov/scams-safety/fraud/fraud (accessed 2 August 2011). National Fraud Center. (2011). Types and schemes of white-collar crime. Charleston, SC. Available in: http://www.ckfraud.org/whitecollar.html (accessed 2 August 2011). NERA Economic Consulting. (2009). SEC settlements in ponzi scheme cases: Putting Madoff and Stanford in context. NERA Consulting. Securities and Exchange Commission. (2011). What is a ponzi scheme? Washington: Securities and Exchange Commission. Available in: http://www.sec.gov/contact/addresses.htm (accessed 2 August 2011). Vecchio, T. and Laigaie, D. (2009). Clawback provisions used to recover from ponzi scheme investor. The Legal Intelligence, 26 August 2009, 240 (41), 1. Read More