Aiding and Abetting a Ponzi Scheme: Civil Liability for Third-Parties

by Robert Neary | January 2019

Charles PonziPonzi schemes have become ubiquitous in today’s investing world. At any given time, there are innumerable Ponzi schemes being carried out against unsuspecting investors. Due to headline-grabbing cases such as the Bernie Madoff scandal, many investors are now aware how these schemes operate. Typically, the perpetrators of a Ponzi scheme will promise “too good to be true” investment returns and then use new investment funds to pay earlier investors to keep the scheme afloat. Another unfortunate aspect of Ponzi schemes is that the fraudsters frequently use the investor’s money to fund a lavish lifestyle for themselves. The fraudsters’ Ponzi scheme will unravel once they are unable to secure new investment funds to keep paying off earlier investors. Once the schemes collapse, and they always do, the most important question for investors is: How can they get their money back?

The SEC or another government agency will usually file a civil lawsuit (and perhaps a criminal case) against the fraudsters and seek to recover funds on behalf of the investors. However, all too often, because the fraudsters have spent the investment funds on themselves instead of in legitimate investments, there are little to no funds to recover.

Nevertheless, there may be other legal avenues that investors can pursue to recover funds. Ponzi schemes are rarely able to survive for long periods of time without some form of assistance from a third party – from its direct involvement in the Ponzi scheme to ignoring various “red flags” that were raised by the fraudsters’ actions. The following businesses or persons may be liable for aiding and abetting a Ponzi scheme:

• Banks,
• Brokerage Agencies,
• Attorneys, and
• Accountants.

One or more of the above professionals or businesses may actively or passively aid and abet the Ponzi scheme in various ways during its operation. For example, a brokerage agency may be liable if the fraudster worked there and used the business to operate the scheme, or the assistance could come from an “insider” at the bank who clears holds on the fraudsters’ accounts due to irregular banking activity; or, finally, from lawyers or accountants who have direct contact with investors and vouch for the investments. These professionals are often governed by various laws or rules and regulations and their actions, or inaction, can lead to civil liability.

Kozyak Tropin & Throckmorton

Robert Neary
Robert focuses on complex litigation including class actions on behalf of investors or consumers. Robert, along with other colleagues, successfully litigated over twenty class action cases against major banks and insurance companies regarding their lender-placed insurance practices that led to hundreds of millions of dollars of class relief being made available to homeowners across the country. Robert also has experience representing investors in FINRA arbitration matters against brokers. He currently serves on the Consumer Protection Committee with the Florida Bar.

Share this article: