A person in Texas may be accused of operating a Ponzi scheme if they are running an investment scheme that is completely funded by new investors. In a Ponzi scheme, the organizer will promise investors a return on their investment even though the organizer knows that there are no real business earnings. Early-stage investors will then be paid with money that comes in from new investors.
Ponzi schemes are considered a type of investment fraud because they involve a false promise that money will be invested in profitable ventures that often don’t exist. In order to maintain operation, a Ponzi scheme requires a continual flow of new investors. When the organizer of a Ponzi scheme is unable to find enough new investors or a significant number of old investors decide to cash out, the scheme usually collapses.
Ponzi schemes are often identified for some of their key characteristics. One of these characteristics is the promise of a high return on a financial investment with little or no risk for the investor. If returns on investments are unusually consistent, and the investment strategies are not transparent, these could also be red flags that lead law enforcement to accuse a person of operating a Ponzi scheme.
There are situations where a well-intentioned person could make a poor investment decision with other people’s money. If the person then tries to correct their mistake by paying off investors with newly invested money, the person could end up being accused of operating a Ponzi scheme. An attorney may be able to help a person in this situation to argue that a real investment was made, and there was no intention of perpetrating a fraud on investors.
Source: US SEC, “Ponzi Schemes “, December 01, 2014