30 May 2012
An interesting headline caught our eye this week. It read as follows: Local Man Sentenced for Role in Ponzi Scheme. The case involved the sentencing of John Clement, who pleaded guilty to defrauding investors out of about five million dollars, and was sentenced on May 22. We’ve all heard the expression “Ponzi scheme,” so we thought it would be interesting to find out what Clement did, and how his actions became labeled as they did.
Ponzi schemes have been around since at least the mid-1800’s, but they didn’t get their name until about 1920, when Charles Ponzi concocted a scheme to defraud investors. He diverted and misapplied so much investor money that he got a scheme named after him. What he did was to pay dividends or interest payments to new investors not from income, but from money received from prior investors. In that way, he made it appear to the investors that the business was making money, when in fact the entire operation was a scam.
Actually, Ponzi schemes are not all that unusual. Just last year, an Austin-based investment broker was convicted of defrauding investors out of millions as part of a Ponzi scheme. The reports of the guilty verdict specifically noted that his conduct included taking the money of new investors, and using it to pay dividends to prior investors.
Getting back to John Clement, he apparently induced people to invest in his company, and later hid the fact that he was stealing the money by giving the original investors returns on their investment with money paid by newer investors. Like all Ponzi schemes, the entire deal collapsed when there were no new investors.
If you look at accounts of Ponzi schemes over the years, they all have another thing in common – they begin with false statements made to induce people to invest money. The Ponzi scheme isn’t utilized to attract investors in the first instance; it’s used to cover up the fraud with which the scheme began. According to a press release issued by the U.S. Securities and Exchange Commission, Clement started the ball rolling by making a number of false statements. These included
- Falsely promising a return of 1% to 2% per month;
- Falsely stating the investment risk was limited; and
- Falsely promising that investors could recoup their original investment at any time.
Once the investors gave Clement their money the fraud was complete. It became a Ponzi scheme when Clement used new investment money to fulfill his promises to earlier investors. And while the scheme may have also attracted additional investors, it was essentially used as a cover up. The original crime here was fraud.
Fraud in Texas involves obtaining money or property through deceit, and includes securities fraud, forgery, and credit card fraud, among others. If you have been charged with fraud, you need the assistance of an experienced Austin fraud lawyer to defend you against these charges.
Law Office of David D. White, PLLC
1205 Rio Grande Street
Austin, TX 78701
(512) 369-3737