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Are you liable if you unknowingly participate in a Ponzi scheme?

On Behalf of | Jan 16, 2025 | White Collar Crimes

A Ponzi scheme is a type of investment fraud involving the use of new investor money to pay off earlier investors. The scheme promises abnormally high returns to entice new investors, sometimes as high as 50 percent or more. 

However, the money early investors receive is from new investors, not from actual profits. As long as new money comes in faster than payouts, the scheme will appear successful. But when the system eventually collapses, many of the victims will lose their money. 

Agencies like the Securities and Exchange Commission (SEC) crackdown on these illegal businesses and typically charge liable parties with felonies. Founders, co-conspirators and other parties involved in the scheme can face prison time, substantial fines and even civil penalties. 

However, what if you are only a participant in the scheme? Will you face legal charges, too? Here are some answers that can help. 

Will you face liability as an investor? 

In most cases, people who unknowingly participate in Ponzi schemes are seen as victims, especially if they do not receive any financial benefit. But if your participation involves promoting or recruiting new investors, you may still face some liability. Several factors help determine your degree of responsibility: 

  • Knowledge and intent: If you genuinely did not know you were part of a Ponzi scheme, it may reduce your liability.
  • Financial gain: Even if you had no idea it was fraudulent, you may have to return any financial gains you made from the scheme. 
  • Cooperation: Working with the authorities can often help reduce potential penalties. 

Law enforcement officials will generally prosecute the founders and co-conspirators of the scheme. Even if you played a small role in the game, there is still a risk of facing consequences. 

How can you defend yourself? 

In these types of financial schemes, some participants can be both victims and liable parties. If you are facing criminal liability, an experienced defense lawyer can help you pursue the most favorable outcome possible.

It may seem unfair to face consequences if you are just an unsuspecting investor, but it is not too late to protect yourself.