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Ponzi schemes targeted by federal government

Posted on March 22, 2010 3:00 AM EST

It is no secret that ever since the economy's meltdown in 2007 that the federal government is cracking down on all individuals responsible for planning, organizing and operating the schemes to defraud. With the increased number of complex investment vehicles, creative, yet unscrupulous businessmen have found fertile ground in the American investment community. Unsuspecting victims who are promised enormous returns with little risk get sucked into the fraud, sometimes losing their entire life savings. Those arrested and prosecuted by the federal authorities find themselves indicted on charges including mail fraud, wire fraud, money laundering and racketeering. Anyone being prosecuted in the Southern District or Middle District of Florida for their involvement in this type of fraud should consult with a South Florida or Miami criminal defense lawyer experienced in defending these types of cases in federal court.
A Ponzi scheme simply defined is a scheme to defraud by which the perpetrator solicits investors with the promise of hefty returns which are initially fulfilled by paying off older investors with proceeds from later entrants into the investment scheme. The lifeline of the fraud is the continuous inflow of new investors and their money. Once new investors stop pouring their money into the scheme, the money dries up and the older investors cease to reap the enormous gains. Typically, Ponzi schemes are uncovered during times of economic turmoil when investor fear causes people to hold onto their money. That is why the economic crisis in 2007 led to the uncovering of the large number of high profile Ponzi schemes reported in the media over the past couple of years.

Although the first Ponzi scheme was uncovered in the 19th century, the schemes to defraud did not become prevalent until the 1980's and 1990's. In 1985, a currency trader named David Dominelli defrauded over a thousand investors out of approximately $80 million. Dominelli entered a guilty plea in federal court to four related fraud counts and was sentenced to 20 years in prison. Over the past decade federal authorities have ramped up their efforts to prosecute these schemes to defraud. As a result of their efforts, high-profile arrests have been made. Of course, the most well-known prosecution was that of Bernard L. Madoff. Madoff was able to run his Ponzi scheme for many years because of his reputation on Wall Street. As the former chairman of the Nasdaq Stock Exchange, he was able to lure investors into his firm. When the scheme collapsed, investors lost approximately $50 billion. Madoff entered guilty a plea in federal court to charges including securities fraud, wire fraud, mail fraud and money laundering. He received the maximum sentence of 150 years in prison.

Due to the complexity of the Ponzi schemes, the cases are prosecuted in federal rather than state court. The Department of Justice usually heads up the investigations which are then turned over to the United States Attorney's Office for prosecution. After a conviction after trial or a guilty plea, a federal judge will hand down a sentence based on the federal sentencing guidelines. Although the guidelines are no longer mandatory, a federal judge will usually apply them unless there is a basis for deviation. As in all economic fraud cases, the amount of the loss will usually determine the amount of prison time that will be handed down by the judge.

Ponzi Schemes: A Primer on the Recent Surge in Fraudulent Schemes, Lexology.com, March 19, 2010.
Categories: Fraud