Residents of Newport Beach, California, who follow the news have probably heard about Ponzi schemes. Many of these white collar crimes make the national news, particularly when the amount of money involved is in the millions of dollars and charges get filed in federal court.
To explain a Ponzi scheme further, it starts with the organizer of the scheme making promises to would-be investors that if they choose to invest money with the organizer, than they will get a high rate of return on their dollars. The organizer in turn is able to take a cut of the investors’ money.
The organizer may well invest the money, but in a Ponzi scheme, he or she will spend most of the time attracting new investment in to the scheme. The organizer then funnels the new money back to the existing investors, who at that point think everything is fine and that they are indeed getting a high rate of return as promised. In fact, the investment could be performing poorly.
However, the scheme naturally dies when there are no more new investors. At that point, profits dry up, and existing investors lose confidence. When they go to sell off, they discover their money is gone.
Sometimes, brokers and others make mistakes or get themselves in to sticky financial situations, like a Ponzi scheme, and are in over their heads before they know it. On the other hand, the fact that an investment does not perform as a broker thought, or even that the broker was drumming up new business, are not themselves proof of a Ponzi scheme. As with other white collar crimes, it is easy for authorities to sometimes confuse honest errors or, at worst, careless mistakes for criminal activity.
