Such is the lure of Ponzi schemes. First identified by the Supreme Court in the 1924 case of Cunningham v Brown, 265 U.S. 1 (1924), the phrase “Ponzi scheme” was coined to describe the exploits of an early-20th Century con artist. Charles Ponzi swindled investors of more than $20 million with an investment opportunity supposedly based on buying and reselling postal reply coupons.
Today, a Ponzi scheme refers to a fraudulent investment opportunity wherein stakeholders receive distributions, typically referred to as “dividends” or “interest,” derived from funds paid in by later investors – not on revenue produced by actual investments. Earlier investors tend to fare better than later investors, often even making what looks like a profit. But eventually the game is up. That’s when state or federal court receivers or bankruptcy trustees become involved.
Today, a Ponzi scheme refers to a fraudulent investment opportunity wherein stakeholders receive distributions, typically referred to as “dividends” or “interest,” derived from funds paid in by later investors – not on revenue produced by actual investments.
What can you do if you are the victim of a Ponzi scheme and what sort of recovery can you expect? You will be given the opportunity to file or confirm a claim, either through the court system or with the receiver. Once you do, here’s what you need to know:
- Most state and bankruptcy courts determine the allowed amounts of claims by deducting any amounts the investor received from the Ponzi scheme from the amount of the investment.
- Any return on the investment for the early investors – even those funds referred to as interest or dividend payments – are applied to the principal claims. For example, an investor who deposited $5,000 initially and earned $1,000 in dividends during the early stages of the scheme will be allowed a claim of $4,000.
- Under that calculation, predicted profit is eliminated from the claims process. The end goal is to pay back principal rather than interest because in a Ponzi scheme, there are no true earnings in interest or otherwise.
Once the allowed claim amounts for investors have been determined, courts adopt different methods for calculating how available funds are to be distributed. Discussion of the various distribution methods is beyond the scope of this post. Suffice it to say that Ponzi schemes can and do have a devastating effect on investors who are usually acting in good faith. Knowing and understanding the way that claims are determined is a step toward regaining at least a portion of the initial investment in what can be a long and contentious legal process.