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DFPI Alleges Crypto Firms Violate Laws with Ponzi Scheme

California’s Department of Financial Protection and Innovation (DFPI) has issued desist-and-refrain orders to 11 companies for allegedly conducting Ponzi and pyramid schemes.

A desist-and-refrain order is a court or government regulatory order that prohibits the continuation of particular conduct.

White-collar crimes are receiving a renewed focus from state and federal investigators. In May 2022, Gov. Gavin Newsom signed an executive order directing the DFPI to aggressively enforce consumer financial laws. In the fall of 2021, the federal Department of Justice announced additional resources to combat white-collar crime.

On Sept. 30, 2022, the federal Securities and Exchange Commission sued the former lawyer of DC Solar Solutions. The suit accuses him of helping the owner of DC Solar Solutions orchestrate a $910-million Ponzi scheme. The federal government said DC Solar lied about how many generators were truly produced and covered up the fact that it was selling items that didn’t actually exist. The owner was convicted and sentenced to 30 years in prison.

What Is a Ponzi Scheme?

The companies mentioned in the DFPI announcement purportedly received money from new investors and falsely represented that money as profits to pay existing investors.

The tactic gets its name from Italian businessman Charles Ponzi who diverted new investors’ money to pay earlier investors and himself in Boston in 1920. While the conduct predates him, his case received considerable attention. His notoriety led to the scheme being named after him. When his scheme was discovered, he lost $20 million in U.S. dollars (closer to $220 million today).

Arguably the most notorious Ponzi scheme leader in modern American history is Bernie Madoff. He conned investors out of $20 billion. Other Ponzi schemes include the following:

  • Lou Pearlman – $300 million
  • Scott Rothstein – $1.2 billion
  • Tom Petters – $3.7 billion
  • R. All Stanford – $7 billion

What Is a Pyramid Scheme?

The DFPI news release also alleged that the 11 companies operated a referral program that amounted to a pyramid scheme. The entities promised to pay investors commissions if they recruited new investors. They would then receive additional commissions if the investors they recruited, in turn, recruited new investors. The referral programs incentivized investors to create and post content to social media websites to entice others to invest in these entities.

The scheme gets its name from its structure. One investor recruits two more, those two recruit four, and the base widens with each additional layer of recruits. The investor at the top gets a portion of everyone else’s share. Once there are no new recruits, the pyramid collapses. Recruiting people into pyramid schemes is a felony in the U.S.

Consequences of Ponzi and Pyramid Schemes

Ponzi scheme cases are typically charged as felonies:

  • Mail fraud
  • Wire fraud
  • Racketeering
  • Commodities fraud
  • Securities fraud

In California, someone involved in a pyramid scheme can be charged with a misdemeanor or felony. A guilty verdict generally means time behind bars (jail, state prison, or federal prison) and an order to pay restitution to the victims.

Complicated Fraud Cases Require Tactical Representation

Criminal fraud charges can change the trajectory of someone’s life. California and federal laws are complicated. An experienced attorney who understands the nuances of fraud laws is best equipped to build strong defense strategies. You want the team at Corrigan Welbourn Stokke, APLC. As former prosecutors, we can effectively prepare for the tactics the prosecutors will use against our clients.

Schedule a consultation with Corrigan Welbourn Stokke, APLC by submitting our online form or calling (949) 251-0330.