Ponzi Scheme & Pyramid Scheme Lawyers — Bakhtiari & Harrison
What is a Ponzi scheme?
A Ponzi scheme is a fraudulent investment operation that pays returns to earlier investors using capital contributed by newer investors — rather than from genuine investment profits. The scheme creates the appearance of a successful investment operation by recycling investor funds. As long as new investor capital continues to flow in, earlier investors receive their promised returns and believe the investment is working. When new capital slows or stops — or when too many investors attempt to withdraw simultaneously — the scheme collapses, leaving later investors with catastrophic losses.
Pyramid schemes operate similarly but typically require participants to recruit new members rather than invest in securities. Both structures are inherently fraudulent and inevitably collapse — the only question is how long they operate before the fraud is exposed and how many investors are harmed.
Recovery paths for Ponzi and pyramid scheme victims
Claims against broker-dealers and registered representatives
When a Ponzi scheme was recommended or facilitated by a FINRA-registered broker-dealer or registered representative, the investor may have a FINRA arbitration claim against the broker and firm. These claims are among the most significant in FINRA arbitration because they make the entire brokerage firm liable — not just the individual broker — for failing to conduct adequate due diligence on the investment before recommending it to clients. Failure to supervise claims against the firm are particularly powerful when the scheme operated over an extended period.
Claims against feeder funds
Many Ponzi schemes operated through feeder funds — investment vehicles that pooled investor capital and directed it to the scheme operator. When the fund managers failed to conduct adequate due diligence — or in some cases knew or suspected the scheme was fraudulent — investors may have claims against the feeder fund managers in court or arbitration.
SIPC protection
When a broker-dealer fails as a result of a Ponzi scheme, the Securities Investor Protection Corporation (SIPC) may provide protection for up to $500,000 per customer account (including up to $250,000 for cash claims) in certain circumstances. Bakhtiari & Harrison advises Ponzi scheme victims on SIPC eligibility as part of its initial case evaluation.
Clawback risk — net winners
In Ponzi scheme bankruptcies, the bankruptcy trustee may seek to “claw back” payments made to earlier investors who received more than they invested — because those payments were funded by money taken from later investors. Net winners face the risk of being required to return their profits to the bankruptcy estate for distribution to all victims. Bakhtiari & Harrison advises Ponzi scheme investors on clawback exposure.
FINRA arbitration for Ponzi scheme claims
When a Ponzi scheme was recommended by a FINRA-registered broker or firm, FINRA arbitration is typically the primary recovery path. Claims include failure to conduct adequate due diligence, misrepresentation, failure to supervise, and breach of fiduciary duty. Bakhtiari & Harrison has represented investors in FINRA arbitration proceedings arising from multiple Ponzi scheme collapses — including claims against the major broker-dealers whose registered representatives recommended the schemes.
Frequently asked questions — Ponzi and pyramid schemes
Can I recover my losses even if the Ponzi scheme operator has no assets?
Possibly. The scheme operator may be judgment-proof — but the broker-dealer and registered representative who recommended the scheme may have significant assets and insurance. FINRA arbitration claims against the recommending broker-dealer are independent of the scheme operator’s financial condition and frequently produce significant recoveries even when the scheme operator is bankrupt or in custody.
What if I received some returns before the scheme collapsed — does that affect my claim?
Receiving partial returns before the collapse does not eliminate your claim. Your damages are typically calculated as the difference between your total investment and the total amount you received back — your “net loss.” In some circumstances, earlier payments may be subject to clawback by the bankruptcy trustee, which is a separate matter from your claim against the recommending broker.
How quickly should I act after a Ponzi scheme collapses?
Immediately. Ponzi scheme collapses trigger multiple overlapping proceedings — criminal, regulatory, civil, and bankruptcy — with different deadlines. FINRA Rule 12206 imposes a six-year eligibility period. Bankruptcy claim filing deadlines are often much shorter. Contact Bakhtiari & Harrison as soon as you become aware of a Ponzi scheme collapse affecting your investments.
For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.
Contact a Ponzi scheme lawyer — free consultation
Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.
Investor cases are handled on a contingency fee basis — no recovery, no fee.
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The History of Charles Ponzi’s Scheme
Ponzi boasted of delivering a 40% return in just 90 days, a stark contrast to the modest 5% offered by bank savings accounts at the time. His promises led to a flood of investment, with Ponzi reportedly collecting $1 million during one three-hour period in 1921—a staggering amount for the time. Initially, a few early investors received returns, lending credibility to the scheme. However, an investigation later revealed the grim reality: Ponzi had only invested about $30 in the international mail coupons he claimed to be trading.
Such schemes eventually collapse once the flow of new investor money slows down and there are not enough funds to continue paying earlier investors. This type of fraud not only devastates individual investors but can also destabilize financial markets and erode public trust in legitimate investment vehicles.
Ponzi schemes, named after Charles Ponzi who orchestrated a massive fraudulent scheme in the 1920s, are a notorious type of illegal pyramid scheme. These schemes often promise high returns with little risk and use money from new investors to pay earlier investors, creating the illusion of a profitable business. In the case of Charles Ponzi, he enticed thousands of New England residents to invest in a postage stamp speculation scheme by claiming he could leverage differences between U.S. and foreign currencies to buy and sell international mail coupons at a profit.