The recent Ponzi Scheme that defrauded Warren Buffet was described by acting U.S. attorney Phillip Talbert as “the largest criminal fraud scheme in the history of the Eastern District of California. It was an astronomical $1 billion dollar scheme that funded the lavish lifestyle of Jeff Carpoff and Paulette Carpoff.
Jeff Carpoff and Paulette Carpoff ran a business selling mobile solar generators (MSGs). They lured investors in with generous tax credits and promised income from third party leases. When the market demand didn’t match their expectations and the income didn’t materialize, the business started losing money and they began to falsify financial statements and fabricate market demand. They even stopped production of the MSGs and sold investors non-existent machines.
The Carpoffs presented a wealthy and successful image to the world. They spent investor money on gambling, jewelry, homes and cars. They hired the rapper Pitbull to play at a Christmas party, gave their employees large bonuses and reserved a suite at an NFL football stadium. When the couple pleaded guilty, they forfeited around $120 million in assets.
Jeff Carpoff, who was convicted of orchestrating the fraud, received a maximum sentence of 30 years for the crimes of conspiracy to commit money laundering and wire fraud. His wife, Paulette Carpoff, faces a 15 year prison sentence after pleading guilty to money laundering and conspiracy to commit an offense against the United States.
Ponzi Scheme or Pyramid Scheme?
Many people are familiar with the concept of a pyramid scheme. Ponzi schemes and pyramid schemes are very similar (Bernie Madoff is the name that often comes to mind when people think of Ponzi schemes). A pyramid scheme and a Ponzi scheme are both schemes in which new recruits are lured in with guaranteed returns, and these investors pay for the returns of original investors. As there is no real way of generating a return, a pyramid scheme or Ponzi scheme builds up massive liabilities and eventually loses the confidence of new investors and falls apart. With a pyramid scheme, the new investors are encouraged to recruit more investors for a payoff, so people lower down the pyramid are always paying those higher up.
With a Ponzi scheme, funds are funneled to a fund manager and high returns are promised.
In both cases, the people held responsible for Ponzi or Pyramid schemes are those who mastermind it, unless the investors learn what is going on. The original Ponzi Scheme was named after Charles Ponzi, who ran a company that sold international reply coupons through the US Postal service and promised investors a return of 50% within 45 days or 100% in 90 days. Ponzi schemes are generally “too good to be true.”
How Does the Law Treat Ponzi Schemes?
Unlike pyramid schemes, Ponzi schemes are not reliant on new investors to recruit more funding and interest. Ponzi schemes are essentially built on mismatched expectations between investors and the people running the business. The investors think they are getting a return from actual business activity, but the people running the business know that the business is not capable of generating returns. Money invested into a Ponzi scheme goes into a black hole, and this can go unnoticed for years. Continuing deception is involved to keep the business running and the business can build up massive liabilities. The penalties for a long-running Ponzi scheme are extremely severe.
Bernie Madoff, possibly the most famous example of someone convicted for running a Ponzi scheme, received 150 years in prison. He also had to pay 170 billion in restitution.
Because Ponzi schemes are often long-running concerns there may be many co-conspirators and many possible crimes charged. There may also be lawsuits brought by various federal agencies such as the FTC (Federal Trade Commission), SEC (Securities and Exchange Commission) and the IRS, who investigate tax fraud. Ponzi schemes are viewed extremely harshly by prosecutors and the public. A “crack-down” after the Bernie Madoff case encouraged a hunt for Ponzi schemes. They are one of the most severely judged white collar crimes.
Ponzi schemes and pyramid schemes are viewed so harshly that often legitimate multilevel marketing companies are accused of being pyramid schemes. If a business is failing it could be tempting to fabricate returns to “get back on track.” Getting involved in a Ponzi scheme might not be something people set out to do. If you are accused of operating a Ponzi scheme you should talk to an experienced Boston criminal defense lawyer immediately. Regardless of your level of involvement or how “in deep” you are, you will likely be facing federal charges, fines and restitution. You could also be running a completely legitimate business and facing extremely serious charges that could derail your life.
There are a multitude of federal charges associated with running a Ponzi scheme. These could include money laundering, which carries a prison sentence of up to 20 years, wire and bank fraud, which can involve a prison sentence of up to 30 years, and tax fraud. There could also be accusations of securities fraud.
At Dhar Law, we are Boston criminal defense attorneys who have defended a wide range of serious white collar criminal charges. We understand the nuances in cases that seem black and white to the public or prosecutors. If you are being accused of running a Ponzi scheme, you are facing one of the most serious accusations of white collar crime. It’s important to speak to a Boston criminal defense attorney who will fight to defend your freedom and your right to a fair trial.