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What is a Ponzi scheme?

When criminal charges are brought against St. Louis residents, it can be a confusing and frightening time. This is particularly true when the charges involve complicated matters, which can occur when conspiracy allegations are brought by the government.

For example, when the government alleges a person was involved in a Ponzi scheme, it can be confusing at first to decipher the basis of the charges. Ponzi schemes typically involve a system of investment fraud where returns to existing investors are paid from the funds of new investors. The new money that comes into the scheme is used to pay the earlier investors, while the new investors are promised high returns in exchange for their investment.

At a certain point, Ponzi schemes generally collapse because there are not enough new investors to create the appearance of a legitimate business. Alternatively, if a significant number of investors want to get out of the plan, there may not be enough money on hand to allow them to cash out, which can expose the Ponzi scheme.

Ponzi schemes are just one type of investment fraud that may be alleged by the government against a person. Other types of charges may be based on conspiracy-related allegations, where multiple individuals agree to create a fraudulent scheme to defraud others.

No matter what the basis of the charges, individuals need to have a solid understanding of the allegations in order to be able to prepare a defense to the charges. There are often holes in the government's allegations, or areas in which the government may not be able to satisfy its high burden of proof. Accordingly, by realizing these areas and the weaknesses in the government's case, individuals can prepare effective defenses to the charges.

Source: United States Securities and Exchange Commission, "Ponzi Schemes," accessed on Dec. 5, 2014

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