Federal Ponzi Scheme Defense: Investment Fraud Cases.

Federal law does not contain a standalone offense named “Ponzi scheme.” Instead, when federal prosecutors bring charges in an investment fraud case, they typically rely on statutory definitions of other offenses such as mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), securities fraud (18 U.S.C. § 1348), money laundering (18 U.S.C. § 1956), and other related crimes. While prosecutors have a variety of statutes at their disposal, these charges all generally involve a few key elements:

• Using capital contributions from later investors to pay returns to earlier investors
• Utilizing later investors’ capital contributions to enrich the operator of the scheme
• Maintaining a continuous inflow of capital contributions from new investors and existing contributors in order to sustain the scheme

While federal law enforcement agencies generally treat Ponzi schemes as high-priority targets, there is a distinction between a failed investment and a federal Ponzi prosecution. The fact that an investment has failed is not automatically evidence of criminal fraud. Many investments fail, leading to civil lawsuits and legal action. However, failing to repay investors does not per se mean that the promoter, administrator, broker, or investor has committed a crime.

With the exception of a few strict liability offenses, Ponzi prosecutions generally require proof of “knowingly” participating in a scheme to defraud, regardless of the role of the defendants involved. For example, the federal statutes that establish mail fraud and wire fraud all generally require proof of the intent to defraud in order to establish criminal guilt. If you or your company are facing federal criminal charges related to a Ponzi scheme, you should rely on a team of defense lawyers at Spodek Law Group to help you make informed decisions in your case.

Which Federal Counts Can Prosecutors Build From the Same Investment Operation?

Depending on the details at hand, prosecutors are able to bring any of these charges against an individual (or group of individuals). For example, if the defendant conducted the Ponzi scheme across multiple states, the charges could include wire fraud under 18 U.S.C. § 1343. In cases involving the use of the United States Postal Service, mail fraud under 18 U.S.C. § 1341 could be a viable option.

Other counts related to investment fraud can include:

• Securities Fraud (18 U.S.C. § 1348): If the Ponzi scheme involves conduct covered by the statute, prosecutors may bring a securities-fraud charge. Section 1348 applies to knowingly executing or attempting to execute a scheme or artifice to defraud in connection with a commodity for future delivery, an option on such a commodity, or a security of an issuer with a class registered under § 12 of the Securities Exchange Act of 1934 or required to file reports under § 15(d), or to obtain money or property by false or fraudulent pretenses, representations, or promises in connection with the purchase or sale of such a commodity or security.
• Money Laundering (18 U.S.C. § 1956): If a Ponzi scheme involves moving money between accounts or using money for various purposes, this often makes the case fit the criteria for money laundering under 18 U.S.C. § 1956. Additionally, in cases involving the concealment of a crime, money laundering could be an option for the prosecution as well.
• Conspiracy (18 U.S.C. § 371): If two or more people agree to commit a federal offense or to defraud the United States, and an overt act is committed, prosecutors can bring conspiracy charges under 18 U.S.C. § 371.
• Other Criminal Violations: Along with federal charges, criminal violations of state laws or administrative statutes could be brought against individuals involved in investment fraud cases.

If you are facing any of these charges, a federal lawyer from Spodek Law Group can help you understand your rights and defend against the government’s allegations.

When Can a Promoter, Employee, Accountant, or Passive Investor Become a Criminal Target?

In a federal investigation, there are generally three steps to learning if you are a suspect. Step one is receiving a subpoena from the DOJ. If you receive a subpoena, this does not mean that you have been charged or are being formally charged. The DOJ may be using subpoenas to ask for documents, for testimony, for records of financial transactions, for electronic data, for access to email accounts, or for access to other sources of electronic data. Step two is receiving a letter. The DOJ will often send a letter to individuals that tells the recipient whether they are a witness, a subject, or a target. If you are being viewed as a potential suspect in an investment fraud case or federal Ponzi scheme prosecution, you will be called a “target” in the DOJ’s letter.

Promoters and referral agents are at risk of becoming a federal defendant in an investment fraud case as well. If they helped recruit new investors for the Ponzi scheme, or if they got commissions in connection with referral business or investment sales, they can be considered a suspect.

Employees of a Ponzi scheme can also face federal exposure. The degree of their exposure depends on:

• The nature of the employment (i.e., was it executive or clerical in nature?)
• The employee’s knowledge of the fraud
• The employee’s role in furthering the fraud (i.e., was it a supporting role, or was the employee helping lead the charge?)
• The employee’s conduct (i.e., was the employee trying to help a customer, or was the employee trying to persuade the customer to increase their commitment?)
• Whether the employee received special benefits (like a commission or bonus) based on recruiting new investors for the investment operation

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

How Do SEC Proceedings, Receiverships, Freezes, and Clawback Claims Affect the Defense?

Even if the DOJ does not move forward with a criminal trial, the SEC can pursue enforcement proceedings in parallel. SEC enforcement proceedings are not dependent upon a criminal conviction, and the SEC can seek civil penalties, injunctions, and other judgments regardless of the results of a criminal prosecution.

In most cases involving alleged Ponzi schemes or other forms of investment fraud, federal judges will appoint a receiver to handle the situation. Receivers are tasked with controlling all assets of the entity in question, which often involves freezing bank accounts, seizing property, and pursuing claims in civil court.

From the receivers’ perspective, the Ponzi operation was a “wash,” and any money that has already been distributed to investors needs to be put back into a single pool to be distributed as fairly as possible. In this situation, receivers may pursue claims for the return of any money that an investor received in excess of their original investment. If you received more than you contributed, you may be facing clawback claims even if you had no way of knowing about the fraud when you invested with the defendant.

When investors or promoters face parallel civil and criminal proceedings, this can create complicated litigation challenges. A defense team must ensure that their responses in one proceeding do not inadvertently undermine their defense in the other. For example, while an investor may have the legal right to invoke their Fifth Amendment rights during a civil proceeding, doing so could lead to an adverse inference that could be used to their detriment. At Spodek Law Group, we assist our clients with deciding how to respond to SEC enforcement proceedings, receiverships, freezes, and clawback claims in light of their broader criminal defense needs.

What Losses, Restitution, and Sentencing Disputes Determine the Case’s Financial Exposure?

The largest financial exposure in a federal Ponzi scheme prosecution is often not the fine or the restitution amount, but the term of imprisonment that results from losses, as measured by the U.S. Sentencing Guidelines. In federal fraud cases, the sentencing guidelines use a calculated dollar loss to establish a range of potential prison time. While this seems straightforward, forensic accountants can help challenge government estimates, tracing investor funds and examining transactions to ensure that investors’ losses are calculated accurately and do not include funds that were not actually lost.

Limitations Period, Plea Agreements, and Cooperation Agreements

Along with defenses to the underlying charges and challenges to the amount involved, defendants in federal fraud cases may have various other defenses and options available. These include:

• Statute of Limitations Period: Many federal fraud offenses are generally subject to a five-year statute of limitations period, but some offenses have longer periods, including ten years for certain fraud affecting financial institutions and six years for securities fraud offenses. Defense lawyers will carefully examine the scope of the investigation and any transactions involved to ensure the government is within the applicable limitation period.
• Plea Agreements: Whether the case proceeds to trial or ends in a plea deal, the defendants involved can face substantial exposure regardless of the resolution. However, many federal white-collar cases settle with a plea agreement. These agreements can result in reduced charges, shorter prison sentences, or reduced restitution, among other sentencing considerations.
• Cooperation Agreements: It is also common for defendants to enter into cooperation agreements with the government in order to receive a reduced sentence. But, cooperation does not guarantee a reduced sentence or even a reduced charge, especially if the target is a main defendant in a Ponzi scheme prosecution.

Net-Loss Disputes

In many Ponzi cases, the amount of restitution that the defendants will have to pay will be determined by the “net loss” in the case. While the amount invested is known, calculating an individual’s “net loss” often involves complex calculations as a result of:

• Unpaid interest that does not qualify as a “loss” under the law
• Payments that should be deducted as credits toward the amount owed
• Questions about how many individuals qualify as “victims”
• Questions about the methodology used to calculate the net loss amount

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028 to speak with our team.