Financial fraud is an example of white-collar crimes, which are nonviolent schemes committed by industry professionals, hence the name origin. While there are several kinds of financial fraud scams in New York, a common type is a Ponzi scheme.
Overview of a Ponzi scheme
A Ponzi scheme is financial fraud that promises investors a huge return for a small investment. However, the money comes from other investors, which means the scam needs a steady flow of them to survive.
Charles Ponzi, an Italian con artist in New York, ran a scam in 1919 involving international reply coupons and gave the Ponzi scheme its name. Ponzi learned he could purchase cheaper coupons in foreign countries and resell them in the United States for huge profits. He claimed that the investors could profit 50% in 45 days and 100% in 90 days, but the scam soon failed.
While the scheme takes its name from Ponzi, it has existed since the late 19th century. One prominent scam called the “Ladies’ Deposit” was run by Sarah Howe, who promised women an 8% profit if they invested.
Signs of a possible Ponzi scheme
Besides promising a high return, the scammer promises the investor consistent positive returns with no risk. However, market conditions influence the profitability of returns, so there isn’t an investment without some risk.
A person offering a financial investment must register with the Securities and Exchange Commission, which gives investors access to information they need. A seller of investment opportunities must also be licensed in the state they sell, which means a scammer won’t likely be licensed. Investors may find it hard to withdraw funds, and the scammer keeps insisting to reinvest, promising them high returns.
The penalties for Ponzi schemes can carry six-figure fines and up to 20 years of jail. However, the prosecution must prove that the defendant knowingly and willingly took part in fraud to charge them formally.