Welcome to our White-Collar Crimes series, where we break down each type of white-collar crime and the penalties that come along with a conviction. In our first installment, we'll be covering Ponzi schemes.
What Are White Collar Crimes?
Before we dive into specific types of white-collar crimes, it's important to understand what they are. The term 'white collar' refers to more affluent people who generally work in business or other office jobs instead of blue-collar workers who generally perform manual labor. Offenses committed by these workers are called white-collar crimes and often involve money.
Most white-collar workers are of a higher social status and are often more affluent. They aren't in the poor or working classes, but they can be middle or upper class, depending on their spot in the corporate hierarchy.
For example, two people can work in the same building, but person A works in the executive suite while person B works in environmental services. Person A is a white-collar worker because of their position and job requirements, while person B is a blue-collar worker because they do primarily manual labor. It's not the location of the workplace that matters but the job position and level of responsibility.
What Is a Ponzi Scheme?
One of the most infamous white-collar crimes is the Ponzi scheme. Named after Charles Ponzi in the 1920s, these schemes involve keeping investment money and paying investors with leftover funds.
In general, Ponzi schemes only work if there is a steady stream of new investors who don't pay close attention to where their returns are coming from. This allows the business to make a profit regardless of its actual performance or success.
So, if a company has a failing product or isn't performing as planned, the leaders can continue to project high numbers and have money to show for it from the investment pool. Even though the product may fail or the business goes under, it can appear to the investors that the company is running smoothly.
How They Work
The originator or "schemer" tells their investors that if they invest $1000, they will receive a regular return of at least $100 and the option to withdraw their original investment. The investor takes the bait and pays the base amount, and waits for their return. Like clockwork, they get regular payments of $100, and they're more than happy to stay on as an investor.
What they don't know is that those $100 are coming out of a bigger pool of money collected from a group of investors already associated with the company. Because everyone feels confident and secure in their investment, they stay on instead of withdrawing.
Eventually, the schemer sends out a memo explaining why the investor will no longer receive their $100 return. This is problematic because the investor is stuck without a regular return, and they can no longer withdraw their original investment while the schemer runs off with the rest of the investment pool.
Ponzi Scheme Examples
Two of the most famous schemers are Charles Ponzi and Bernie Madoff. Charles Ponzi created an international reply program from the U.S. Postal Service and allowed customers to purchase coupons for pre-purchased postage in exchange for priority airmail stamps.
Charles used this program to deceive investors with promises of 50-100% returns in as little as 90 days. Instead of providing actual returns, he used the investment funds to pay off investors and the rest for personal use. He was eventually caught and charged with several counts of mail fraud.
The most famous Ponzi schemer of the 21st century was investment mogul Bernie Madoff. Madoff's grand scheme went on for at least 20 years and defrauded thousands of people out of billions of dollars.
He used his investment firm as a tool to lure those new to investing into his massive web. In exchange for money, Madoff promised investors that he would put their money into stocks on their behalf and return their profit directly to them.
In reality, Madoff put all of the money into a single account at JPMorgan Chase & Co. and let the profits grow exponentially over time. At the height of his scheming, Bernie Madoff made at least $100 million a year from defrauded funds and lies. He was eventually caught and sentenced to 150 years in prison, where he died on April 14, 2021.
Ponzi Punishments
Most Ponzi schemes take time to uncover due to their seemingly innocuous nature, but when they inevitably fall apart, the court becomes responsible for investigating and prosecuting the person responsible.
While Ponzi schemes are in a league of their own, they often involve other crimes like mail or securities fraud. In general, these crimes may result in prison time and/or restitution to the victims. In Madoff's case, the court sentenced him to 150 years in prison and forced him to turn in over $170 billion.
The punishment for involvement in a Ponzi scheme depends entirely on the scope and harm resulting from the scheme – they often result in restitution and forfeiture, but the exact punishment is unique to each case.
Key Takeaway
Ponzi schemes are often far-reaching and extremely harmful to the victims, which is why the court punishes these cases with a firm hand. They take years or even decades to fall apart, and the larger the investment pool, the greater the damage.
Keep up with The Draskovich Law Group's White-Collar Crimes series, and join us next time as we cover insider trading!