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Federal Court Distinguishes Securities Fraud From Ponzi Schemes

A recent opinion by a Federal Circuit Court of Appeals elaborated on the distinction between securities fraud and a Ponzi scheme – specifically, a key point in the court’s decision was that “not all securities frauds are Ponzi schemes.”

The decision stems from accusations made by the Securities and Exchange Commission (SEC) in 2009 that various related corporations and individuals were engaged in securities fraud. As part of this litigation, a receiver was appointed to oversee the accused assets – at which time she notice the company had donated various amounts of funds to charities prior to the filing of the complaint by the SEC.

In an attempt to recover these funds, the receiver argued before a federal district court that the charitable transfers were fraudulent – which the district court agreed with and ordered the charity to pay back the money.

However on appeal to the Circuit Court, it was argued by the receiver that the alleged fraudulent company had engaged in a “Ponzi-like” fraud – meaning that the charity would face an uphill battle to keep the money because a transfer from a Ponzi scheme are “presumptively made with the intent to defraud.” Thus, the Circuit Court ultimately had to decide if this situation was in fact a Ponzi scheme or just securities fraud.

According to the Court’s opinion, the receiver had the burden of proving there was a “presumed intent to defraud.” The court reversed the district court’s decision for lack of evidence, stating that “not all securities frauds are Ponzi schemes.”

Securities fraud includes all types of illegal money-making scams like pyramid schemes, manipulation of securities, high-yield investment programs, misappropriation or theft of funds, insider trading, unregistered securities, naked short selling, false statements and Ponzi schemes.

Ponzi Schemes

While Ponzi schemes are a type of securities fraud, they are a specific kind of investment fraud. In Ponzi schemes, new investors are promised high returns at low risk. Some returns are paid to earlier investors from the contributions of new investors, while the fraudsters pocket remaining funds for personal use. In contrast to other types of securities fraud where crimes surround legitimate investment activity, there are no actual investments or earnings in Ponzi schemes. When new investors become difficult to find, Ponzi schemes collapse.

As this case indicates, the laws surrounding allegations of securities fraud are quite complex – with small distinctions making large differences. If you were recently charged with a securities fraud crime, contact a local criminal law attorney with securities law experience. A securities law lawyer can help you navigate the securities fraud battlefield and minimize the harm for all involved parties.