Ponzi Scheme on the Internet
Ponzi schemes are flourishing in the world; as a manifestation of the inexhaustible money and power ambition that drives the 21st -century society. It is difficult to assimilate how brilliant minds, such as those conducting these schemes, can infamously steal money from elderly, children's inheritance, and from those who have worked hard to save for retirement. This is precisely what the most recent Stanford Ponzi scheme did and what many other have done in the United States and other countries. Now, Ponzi schemes are conducted on the Internet as well. This article provides information on a Ponzi scheme conducted on the Internet.
A Ponzi scheme is a pyramid-type investment where investors are paid profits from newly attracted investors and offered large returns on their principal investments. Most Ponzi schemes are not supported by any underlying business venture; it derives benefits from other investors but not from a business undertaking. Thus, those on the top of the investment are the ones receiving most of the benefits, and obviously, they are the brilliant minds behind the scheme. The goal is to recruit as much investors as possible so everyone in the pyramid can receive returns. When the pyramid collapses, investors lose their principal investment. The brilliant minds behind these schemes know that sooner or later investors will lose their principal. Thus, when authorities confirm, with evidence, the existence of a Ponzi scheme, a presumption of actual fraudulent intent is applied.
The Security and Exchange Commission (SEC) is the United States (U.S.) authority that investigates and files law suits against those conducting Ponzi schemes. On July 9, 2007, SEC filed a lawsuit against a company involved in a Ponzi scheme on the Internet. Defendants were fraudulently selling unregistered securities via the Internet. Defendant's assets were frozen by a District Court order and defendants, through their receiver, filed petitions under chapter 11 of the U.S. Bankruptcy Code. CEP Holdings Inc., v. All Defendants in the Adversary Proceedings, CASE Nos. 07-71810 and 07-71813 (Bankruptcy Court, Northern District of Georgia). Defendants operated three websites, colonendparenthesis.com, coasting88.com, and CEPcoast.com, through which they invited the public to participate in investment programs. Initially, investors paid through PayPal or E-Gold, but later payments were made through accounts opened at CEP trust (CEP.com), an online payment processor. The website did not call these payments "investment," but they did promise high returns on the principal paid by participants. Indeed, at trial, defendant did not contest that their activities constituted investment activities. Participants transferred funds to CEP.com and promised daily earning of 2% or 60% per months on deposited funds, for a period of six to twelve months. Earnings were to be credited to the participants' account in CEP.com. The three websites mentioned above offered different clever ways to entice participants.
On trial, it was discovered that none of these three websites or business had financial statements, or supporting ledgers, or balance sheets, no real estate property, and none of them had bank accounts. Monies entered CEP trust account and then were transferred to defendants as profits or earnings. Over U.S. $17 million were deposited in these accounts and transferred to defendants' accounts as earnings. It was also discovered on trial that defendants had no source of income other than these "earning" transfers from the Ponzi scheme websites.
SEC proved with preponderance of evidence that defendants operated a Ponzi scheme through these websites and that these websites did not represent legitimate businesses. Due to this holding, the bankruptcy held that defendants were insolvent within the period of time the operated this Ponzi scheme.
The name of the Ponzi website or how these websites call the investment, "membership fee," or "registration fee," is irrelevant for purposes of SEC scrutiny. In this case, defendants did not call participants' fees investment and had notices informing participants that this was not a Ponzi scheme website. Yet, the fraudulent activity is what the law sanctions, no matter how wisely the Internet transaction is structured and the name assigned to participant's investment funds. Once, it is proven that the transaction constitutes a Ponzi scheme, fraudulent intent is presumed.