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How does a Ponzi scheme work?

On Behalf of | Nov 18, 2015 | Criminal Defense, White Collar Crimes |

Sometimes, when entrepreneurs are looking to finance their business projects, they reach out to others for investment money. This is a common practice, and very few businesses would ever get off the ground without the help of investors. While investors should understand that putting money into a business venture can have risks, they also expect that they should have a fair and reasonable chance at recouping and profiting from their investments.

However, if a company is dependent upon constant monetary infusions from investors to stay afloat and those investors have no real chance of ever getting their money back, it is possible the company’s owners may be guilty of committing financial fraud. An example of such a scenario is what is called a “Ponzi scheme.”

Essentially, a Ponzi scheme involves an individual recruiting investors by telling them that they will receive above-market rate returns on their financial investments. The individual may also further entice investors by promising them commissions if they help draw in other investors.

The initial investors are paid by money put up by the new investors in order to make the operation appear legitimate. However, since Ponzi schemes require more investors to pay off existing investors, it is inevitable that the operation will collapse.

In some cases, Ponzi schemes are set up by people who have no intention of ever paying most of the investors. In other cases, a struggling entrepreneur may get into a bind while trying to keep a legitimate business going by bringing in more and more investors. However, in the end, the result is typically the same; most of the investors lose their money, and the person who sought the investments could be facing charges for investment fraud.

If you are being investigated for or have been charged with, engaging in fraudulent activity, it is very important to prepare a strong defense. A Louisiana while collar crimes attorney may be able to help you successfully defend yourself against the charges.