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Ponzi Schemes and Pyramid Schemes Under SEC Scrutiny
|Last Updated on: 24th September 2023, 05:26 pm
Ponzi Schemes and Pyramid Schemes Under SEC Scrutiny
The Securities and Exchange Commission (SEC) has been cracking down on Ponzi schemes and pyramid schemes in recent years. These types of investment fraud target unsuspecting investors with promises of high returns and low risk. However, in reality, the money from new investors is used to pay earlier investors – until the whole scheme eventually collapses.
The SEC has brought numerous charges against the perpetrators of these schemes, seeking to hold them accountable and return money to defrauded investors. Let’s take a closer look at what Ponzi schemes and pyramid schemes are, some of the major SEC cases, and what it all means for investors.
What are Ponzi Schemes?
A Ponzi scheme is a type of investment fraud where money from new investors is used to pay supposed “returns” to earlier investors. The scheme is named after Charles Ponzi, who became notorious in the 1920s for using this tactic [3].
Here’s how it works: The organizer promises high returns on investments, often with little to no risk. They may claim to have special investment strategies or inside information that allows them to be so profitable. New investors are enticed to put in money based on these promises and on seeing the “returns” that earlier backers received.
But there are no actual investment profits being made in a Ponzi scheme – the payouts to existing investors are simply funded by fresh money from new backers. As long as new investors keep coming in, the scheme can keep going. But eventually it falls apart when the organizer can’t find enough new participants, or when too many investors try to cash out [6].
What are Pyramid Schemes?
Pyramid schemes are a type of illegal money-making scam based on a hierarchical setup. New participants pay to join the scheme and rise to the top by recruiting other new members, who also pay to join.
The organizers at the top earn money from the buy-ins of newer members at the bottom. The problem is, for most participants, the money only flows upwards – the vast majority never make back what they paid to join. When recruitment dries up, the pyramid collapses [3].
While pyramid schemes may try to sell actual products to disguise themselves, the focus is overwhelmingly on recruitment. The promise of outsized returns based on recruiting others is what makes them fraudulent.
Major SEC Ponzi Scheme Cases
The SEC has pursued many high-profile Ponzi cases over the years, targeting schemes that took in hundreds of millions from investors. Some major examples include:
- Forsage – In 2022, the SEC charged 11 individuals for allegedly running a crypto pyramid scheme called Forsage that brought in $300 million [1].
- Trade Coin Club – The SEC charged the creator of Trade Coin Club in 2022 for a scheme involving a fake crypto trading bot that scammed investors out of $295 million globally [2].
- QubitTech – In 2021, the agency charged four individuals behind the QubitTech scheme that targeted investors through social media and raised over $100 million [not cited].
- Future Income Payments – The SEC halted this $300 million scheme in 2018 that targeted retirees and promised annual returns as high as 10% [not cited].
In each case, the organizers falsely promised high returns to lure investors and used money from new participants to pay earlier ones – concealing the fact that no legitimate profits were being made.
Recent Pyramid Scheme Actions
While less common than Ponzi schemes, the SEC has still pursued enforcement actions against large pyramid schemes as well:
- iGenius – In 2021, the SEC charged actors behind the iGenius scheme that allegedly defrauded over 33,000 investors of $125 million through false promises of lucrative commissions [not cited].
- IM Mastery Academy – The agency obtained an asset freeze in 2022 against this scheme that targeted students on social media and coerced them to recruit others [not cited].
- My7Network – Seven individuals were charged in 2018 in relation to this alleged $45 million scheme promoting internet-connected digital displays [not cited].
These cases show the SEC’s commitment to halting pyramid schemes that rely on endless recruitment over the sale of real products or services.
Protecting Retail Investors
A major goal of the SEC’s enforcement actions is to protect everyday investors from getting caught up in these schemes. The agency has specifically warned investors to be wary of any opportunities that [3]:
- Promise no risk or guaranteed high returns.
- Require you to recruit new participants.
- Claim profits come solely from recruiting others.
- Encourage investing through cryptocurrencies or credit cards.
When announcing cases, the SEC often points investors to resources like the Office of Investor Education and Advocacy for more tips on spotting and avoiding investment fraud.
Aggressive Use of Asset Freezes
Another key tool the SEC uses against Ponzi and pyramid schemes is asset freezes. These court-ordered injunctions prohibit the accused from accessing or disposing of their assets or investor funds.
Asset freezes help prevent the organizers from benefiting from the scheme and absconding with money. They also preserve funds for potential return to victims down the road. Examples of asset freezes include:
- $450 million frozen in an alleged real estate Ponzi scheme [5].
- $125 million frozen in the iGenius pyramid case [not cited].
- $15 million frozen in the Forsage crypto case [1].
By moving quickly to freeze assets, the SEC aims to maximize recoveries for duped investors.
Banning Perpetrators from Securities Industry
In addition to monetary penalties, the SEC frequently bars the individuals behind schemes from working in the securities industry or serving as corporate officers. For example:
- The Forsage defendants were prohibited from further securities law violations [1].
- The Trade Coin Club founder was barred from serving as a public company officer or director [2].
- The iGenius defendants were prohibited from registering or trading securities [not cited].
These industry bars aim to prevent recidivism and protect investors from repeated misconduct.
Criminal Prosecutions
In the most egregious cases, the SEC works hand-in-hand with criminal law enforcement to pursue parallel civil and criminal actions. Examples include:
- The founder of ZeekRewards received a 10+ year prison sentence on criminal charges in addition to disgorgement of $244 million to the SEC [not cited].
- The leader of OneCoin crypto scheme faces a maximum 50 year prison sentence on wire fraud charges along with a civil penalty [not cited].
- The Woodbridge Ponzi scheme perpetrator pled guilty to criminal charges and settled SEC charges with a $1 billion penalty [not cited].
Parallel criminal cases allow for more complete justice, especially for organizers who perpetrate egregious and long-running schemes.
The Need for Ongoing Vigilance
Despite the SEC’s efforts, investment scams continue to evolve and target new victims. As the cases above show, Ponzi schemes and pyramid schemes are still pervasive and can operate for years before being halted.
The rise of cryptocurrencies has provided organizers new ways to lure investors while hiding scheme activities and fund flows. Social media also enables recruitment and promotion to wider audiences than ever before.
To keep up, the SEC has ramped up its focus on crypto-related schemes under new specialized units [not cited]. The agency has also formed a Retail Strategy Task Force to better protect everyday investors from emerging threats and frauds [not cited].
But investors also need to be aware of the warning signs of investment scams. Unregistered offerings with guaranteed returns or recruitment bonuses should be viewed with skepticism. Always research investment sponsors, promoters, and products thoroughly first.
If you suspect a Ponzi, pyramid, or other investment scheme, report it! You can contact the SEC or your state securities regulator to get help or file a complaint.
With vigilance from regulators and investors alike, we can work to put these abusive schemes out of business for good.