Fraud Crimes and Ponzi Schemes

Posted by Chris Morales on Fri, Mar 28, 2014 @ 09:00 AM

Learn about criminal fraud, from ponzi scams to pigeon drop schemes.

Fraud crimes involve theft through misrepresentation and other deceptive tactics -- put more simply, a fraud scammer tricks a victim out of money through lies and false promises. This article defines the crime of fraud and looks at common fraud scenarios like identity theft, Ponzi schemes, and the "pigeon drop." 

What Are Fraud Crimes?

Fraud is a label for a variety of theft crimes in which thieves deceive victims into giving up property (usually money, but sometimes title to property). Most crimes of fraud involve misrepresentations that wrongdoers know are false. However, fraud convictions can also result from offenders making assertions without knowing whether or not those claims are actually accurate, and sometimes fraud arises when an offender fails to disclose important information. Fraudulent behavior is punishable as either a felony or a misdemeanor, depending on the value of stolen property.

Fraud Crime Example 1. Skee Merr runs ads targeted at homeowners who are behind on their mortgage payments. The ads promise that Skee can prevent foreclosures. Skee tells customers to sign documents that "temporarily transfer title to me so that I can negotiate lower payments on your behalf." The transactions are fraudulent because of Skee's knowledge that the documents transfer title to him permanently (not temporarily).

Fraud Crime Example 2. Otto Dealer sells a used car to Lane Change. Otto knows -- but doesn't tell Lane -- that the car lacks state-mandated equipment and thus cannot legally be driven in the state. Otto's failure to provide this important information to Lane constitutes fraud.

Common Types of Fraud Crimes

Below is a look at a few common schemes used by fraud perpetrators to separate victims from their money.

Identity Theft

Identity theft is an increasingly popular form of criminal fraud. Identity theft scammers can steal personal information about you (your Social Security number, name, address, telephone number) and/or your financial information (bank account or credit card numbers). 

Pigeon Drop Schemes

In these schemes, a scammer tells a victim (the pigeon) that the scammer has won a huge sum of money in a contest. However, the scammer needs to prove to the game's operators that the scammer had the ability to pay the entry fee if the scammer had lost. The scammer promises the pigeon that in return for the pigeon loaning the scammer the necessary amount of money, the scammer will split the winnings with the pigeon. After the pigeon loans the money, the scammer disappears.

Ponzi Schemes

Ponzi schemes (named for a 1920's-era Italian thief) take advantage of the common desire to make easy money. Scammers attract investors by promising large and safe returns. As new investors join in, scammers pocket part of their investments and use the rest to satisfy earlier investors. Ponzi schemes are doomed to fail because the investments either are of poor quality or non-existent, and scammers have to attract an ever-expanding number of new investors to continue satisfying earlier investors.

One of the most infamous Ponzi schemes was run by former NASDAQ chairman Bernard Madoff. In the largest Ponzi scheme in U.S. history, Madoff cheated investors out of approximately $65 billion. In 2009, Madoff pleaded guilty to numerous federal offenses including securities fraud, wire fraud, and mail fraud. He was sentenced to 150 years in prison.

Mail Fraud

Many illegal schemes involve the scammer's use of the U.S. postal system, whether to solicit potential victims or as a means of correspondence and payment exchange once a victim has been hooked. Since the Constitution gives Congress the power "to regulate commerce among the several states," Congress has enacted mail fraud statutes that let the federal government prosecute schemes involving the postal system.

"Puffing" vs. Fraud

Gullible people cannot necessarily count on fraud statutes to protect them from making poor choices with their money. Sellers are allowed to "puff," meaning that they can make exaggerated general claims that reasonable people would realize are more expressions of opinion than statements of fact. For example, let's say Otto Dealer sells Gully Bell a used car, promising Gully that "everyone will admire you when they see you tooling along in this hot little number." Gully claims fraud when the car is so noisy that Gully feels too ashamed to drive it. No crime took place. Otto's statement was not one that a reasonable person would rely on.

Criminal Fraud: State Law Examples

Here's a look at how fraud crimes are defined and classified on the criminal law books in a few states.

Connecticut: A person who issues a bad check or order on a non-existent account is guilty of a misdemeanor if the amount of the check is less than $1,000 and is guilty of a felony if the amount of the check is over $1,000.

Colorado: Knowingly issuing a false financial statement in order to obtain a loan is a Class 2 misdemeanor.

Arizona: Taking the identity of another person or entity or knowingly accepting the identity of another person is a Class 4 felony.

The Morales Law Firm would like to thank NOLO for sharing this information with us. For more information visit 

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Tags: fraud, Identity theft, victims, crimes, theft