Investment Fraud

Ponzi Schemes

A Ponzi scheme is a fraud that is perpetrated by an individual or company against unsuspecting investors under the guise of the promise of high and consistent returns generated through acceptable and legal means. In reality, the returns and dividends are sourced from other unsuspecting investors. The Ponzi scheme will continue to defraud its victims until the majority of the investors demand full repayment (their principal), and for as long as the perpetrators are able to find others to invest in their scam. In most Ponzi schemes, there is little, or no money actually invested, and even if some of the funds are invested, these investments are usually unsuccessful or unsustainable.

In the early stages of a Ponzi scheme, the promised ‘returns’ are often plentiful and paid out in an expeditious manner in order to induce additional investment by investors. It can also be assumed that satisfied investors will encourage others to consider this opportunity as one that cannot be ignored.

In due course, the Ponzi scheme will ultimately collapse. This can occur when investors or the proper authorities put the pieces together, or because the perpetrators find themselves unable to recruit enough investors to keep the operation afloat. More often than not, though, a substantial amount of damage has been done. By the time the fraud is exposed, the perpetrators will have either spent much of the illegally obtained funds for their own personal benefit or disappeared with their newfound wealth. In any case, it is often difficult – if not impossible – for investors to recoup the funds that they have invested in the Ponzi scheme.

Ponzi schemes are similar to – and often confused with – pyramid schemes, in which participants are encouraged to make an initial investment or purchase with the potential to earn money by recruiting others who will surely fall victim to the very same scheme. While a pyramid-like sales structure (such as multi-level marketing)is not inherently illegal, organizations that operate in this manner can be classified as fraudulent, particularly if the products that are for ‘sale’ are of little or no value, or if the organization’s income is primarily or exclusively obtained by the recruitment of new players as opposed to the sale of goods.

Members of the nagel + associates team have worked extensively on high-profile cases involving alleged Ponzi schemes, in both Canada and the United States. We can assist victims of suspected Ponzi schemes or pyramid schemes by:

• Scrutinizing available disclosure, correspondence and financial records to determine if a ‘fund’ or ‘investment opportunity’ contains the attributes of a Ponzi scheme
• Tracing the suspect’s flow of funds
• Quantifying the damages sustained to the investor
• Conducting investigative interviews of perpetrators and suspects, other victims or other relevant third parties
• Tracing and identifying the possible assets owned by the perpetrator
• Assessing the prospects of recovering the investor’s assets
• Providing expert reports and affidavits
• Testifying as an expert witness at trial

See Nagel’s Corner for examples of recent and noteworthy examples of Ponzi schemes that have been publicized.