Ponzi/Pyramid Scheme Investigative Issues
By: Bill E. Branscum
Copyright 2002

Chain letters and other similar Ponzi/Pyramid schemes involving nominal losses to those who participate are not likely to be investigated by Private Investigators, since no victim would be likely to have suffered the sort of losses that would justify the associated costs. On the other hand, frauds and scams related to investment “clubs,” tax “avoidance” schemes, offshore trusts, etc., may be characterized as Ponzi/Pyramid Schemes depending upon their structure and marketing, and these sorts of scams often involve significant individual losses.

The investigation of these cases is pursued much like the investigation of other financial crimes, but the investigator pursuing them should be aware that:

1) The denial common to most fraud victims often escalates to hostility and resentment in these cases. These schemes typically pay off until the inevitable collapse that the investigator may well precipitate. Even if you convince them that they have been scammed, these “investors” do not want you to “rock their boat,” and they typically blame the investigator who collapses the program prematurely (from their perspective).

2) The operator of the scheme is dependent upon the cash flow provided by the pyramid and therefore vulnerable. Investigation that threatens to collapse an otherwise thriving pyramid often results in a settlement offer based upon a global nondisclosure agreement.

The bottom line is, Ponzi Schemes are outright fraud and Pyramid Schemes are inherently deceptive and contrary to public policy. The deception arises because the market can quickly become saturated and the seemingly endless chain can rapidly end. Consequently, many participants will never recoup their investments, let alone make a profit. See In re Holiday Magic, Inc., 84 F.T.C. 748 (Oct. 15, 1974); Webster v. Omnitrition Intern., Inc., 79 F. 3d 676, 781 (9th. Cir. 1996) and SEC v. International Loan Network, Inc., 968 F. 2d 1304, 1309 (D.C. Cir. 1992).

Further information and discussion regarding the investigation of these schemes is presented in the section entitled, Investigative Strategies.

I welcome your comments, questions and suggestions.

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.