Gaming the System: Are Ponzi Schemers Receiving Proper Criminal Sentences?

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

Ponzi schemes have existed for many years and their internal structure is well understood. Schemers solicit funds from individuals as “investments,” but keep the money themselves and pay “returns” to those investors from additional funds that are received from other new investors.[1] Consequently, the “returns” paid out attract more new investors to invest in the scheme, whose funds are then used to pay out more false “returns” to current investors, thus perpetuating the scheme. The fundamental component of this scheme is the pay out of fake returns. Without these payouts, the scheme would not attract new investors and would not grow and continue to profit the schemer.

Should the sheer act of paying out false “returns” to investors—an essential element of the scheme itself—allow operators of a Ponzi scheme to receive shortened lengths of criminal sentences? While some circuits do not allow fraudulent returns to mitigate sentencing lengths, the Sixth Circuit Court of Appeals recently held that, for purposes of calculating the range of criminal sentencing, the money paid back to a Ponzi scheme’s investors as “returns” on their investments offsets the victims’ total loss from fraud, and thus automatically lessens the length of criminal sentencing.[2]

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