Are Ponzi Schemes Illegal?

Posted on by New Mexico Criminal Law Offices

New Mexico Criminal Defense Attorneys Defending White Collar Crime Charges

handcuffed man writing a statementNew Mexico made headlines a few years ago when the Vaughan Ponzi scheme was revealed. The plan resulted in millions of settlements for restitution and 278 victims of the real estate scheme. Vaughn received 12 years in prison for his scam, and while his sentence occurred years ago, the fallout is still being handled in the state.

Ponzi schemes are widely misunderstood. Some refer to them as pyramid scams, while others consider any investment-like strategy a “Ponzi” scheme.

However, it is important to know the legal differences and what constitutes a Ponzi scheme. After all, a real Ponzi scheme is illegal. But, it is not a state crime. Instead, you are more likely to face federal charges if you were involved in a Ponzi scheme knowingly.

What is the Definition of a Ponzi Scheme?

A Ponzi scheme is an illegal business where new investors fund payments to earlier investors. It features a trickle-down effect like other businesses, but there are fundamental differences with a Ponzi scheme to note.

  • New Money Funds Old Money – Ponzi schemes do not have real investments or real income. Instead, they use the money of new investors to pay old investors. However, the funds are never invested themselves.  These schemes require constant investments from new participants to thrive. Once the new investors run out, the system collapses.
  • Offer Little or No Risk Investments – Ponzi schemes typically say there are little to no risk for investing. However, these require high investment amounts and promise outrageous returns that are improbable in even the best markets.
  • Consistent Returns – All investments have odd returns, and they fluctuate with the market. A Ponzi scheme offers their investors consistently high-value and positive returns, regardless of the market, because they are not investing in the real market. Instead, they only take the investments of new participants and pay the old.
  • Not Registered with the SEC – Companies that encourage new investors must be registered with the SEC and state regulatory agencies. A Ponzi scheme is illegal; therefore, it is not registered with the SEC or any governing agency. Most of these businesses have no valid license to operate either.

Are Pyramid and Ponzi Schemes the Same?

No. While they are closely related, these two are different in the ways they require payments and how the structure of the scheme works. They both trickle down funds from the top of the investor chain to the bottom but are slightly different.

Note, a multi-level marketing program is not a pyramid scheme or Ponzi scheme. While they act similar, these are typically legitimate. However, there are multi-level marketing frauds out there which are pyramid schemes and not real businesses.

Be Careful about Starting an MLM Illegally

If you plan to start a multi-level marketing program (MLM), you must avoid the hallmarks of a Ponzi scheme or pyramid scheme. Certain actions you take could constitute illegal acts, and you could face state or federal level charges.

Some methods to avoid include:

  • Promising easy money, passive income, or high returns regardless of market conditions.
  • Not offering a real product or service with the investment.
  • Not documenting revenue from retail sales.
  • Requiring buy-in to participate. While you can buy products to resell, buying into the company specifically borders on a pyramid scheme.
  • Requiring your investors and participants to recruit more than sell products or services.

At New Mexico Criminal Law Offices, we handle white collar crimes and state or federal level offenses. If you have been arrested for a pyramid scheme or another white-collar crime act, speak with one of our criminal defense attorneys today.

Schedule a free case evaluation at 505-375-4763 or request more information online.