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Home > Blog > Criminal Defense > Ponzi Schemes, and Why They’re Illegal
Oct 31, 2016

Ponzi Schemes, and Why They’re Illegal

White collar crimes happen in so many different ways, it would be impossible to name and describe them all. As soon as the government issues financial regulations, savvy bankers, accountants, and other financial personnel come up with new ways to get around them. This is why a lot of financial regulations are vaguely-worded – by not tying the hands of government regulators to specific words in the law, it allows them to investigate businesses that operate on the fringes of the regulation.

One type of business that is always illegal, however, is a Ponzi Scheme. Here’s why Ponzi Schemes are unique in the field of white collar crime.

Ponzi Schemes are Structured to Defraud

The touchstone of what makes one business legitimate and another one a white collar crime is fraud. By being deceitful for your own financial gain, you toe the line between a legitimate business venture and a fraudulent one.

Ponzi Schemes are built to defraud people. Because they cannot be made in a legitimate way, they are per se illegal.

A Ponzi Scheme is a type of investment fraud. When you invest in a business, you’re giving that business money, and getting the opportunity to reap the dividends of that investment if that business grows. In order to grow, however, a business needs assets that work together to make a profit. Ponzi Schemes, however, don’t have any assets. Instead, they trick people into investing in them for the opportunity to reap dividends taken from later investments.

This is why Ponzi Schemes are often represented by a triangle. The person at the top of the triangle is the one running the Scheme. The two people below are the first ones to invest in the Scheme. The Scheme-master at the top might give them “dividends” back – portions of their initial investment, in order to encourage them to find other investors. The next round of investors line up in the triangle beneath these two, and some of the money that they offer to the Scheme is given back as dividends to everyone above them in the triangle.

No matter how many people invest in a Ponzi Scheme, it is mathematically impossible for the Scheme to grow: It can never have more money in it than what has been given by its investors. Therefore, the collection of a Ponzi Scheme’s investors as a whole cannot hope to make any money because the only assets that the Scheme has is what they have given to it. Meanwhile, the Scheme-master at the top is making a profit by pocketing some of the investments, making the whole venture an instance of deceit for financial gain.

White Collar Crime Attorney William T. Bly

Ponzi Schemes are one of the rare kinds of business ventures that are always fraudulent. Other business ventures are not so clearly illegal. Unfortunately, this can mean that you are running a perfectly legitimate company, and still face allegations of fraud or another white collar crime. If this happens, you need an experienced white collar crime attorney in the state of Maine to prove that what you are doing is not against the law. If you’re in need of a white collar crime attorney to clear your name, contact the law office of William T. Bly online or at (207) 571-8146.

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