Opinion ID: 2708859
Heading Depth: 1
Heading Rank: 1

Heading: Castaldi’s Ponzi Scheme and its Collapse

Text: Castaldi is actually a second-generation fraud artist. He began helping his father in his accounting and other businesses in the 1960s when he was still in high school and later joined his father’s businesses full time. The most important business consisted of selling promissory notes to investors with fraudulent promises of between ten and fifteen percent annual interest. Castaldi also assured his “investors” that the interest need not be reported to the IRS as taxable income. In fact, the proceeds from selling the notes were used for Castaldi’s benefit. When investors were paid interest or return of their principal, the payments were made with only the later investments of new investors, so this was a Ponzi scheme. See Cunningham v. Brown, 265 U.S. 1 (1924) (sorting out assets available in bankruptcy of the original Charles Ponzi); Ponzi v. Fessenden, 258 U.S. 254 (1922) (authorizing federal authorities to produce Ponzi for trial on criminal charges in state court). Such a scheme can work for a while, but it will inevitably collapse when the supply of new investors dries up or enough earlier investors ask for their money back. See, e.g., In re Bernard L. Madoff Inv. Securities LLC, 654 F.3d 229, 232 (2d Cir. 2011), affirming 424 B.R. 122, 128 (Bankr. S.D. N.Y. 2010). In November 2008, one of Castaldi’s investors demanded the return of $500,000 within ten days. Castaldi did not have it. He tried to get the money by soliciting new victims, but he could not raise enough to make the payment. He consulted counsel and then met with the United States Attorney’s Office 4 Nos. 10-3406 & 12-1361 to confess his decades-long fraud. When Castaldi made his disclosure to the government, it had no prior indications of his fraud scheme. Until that time, Castaldi had been able to make all demanded payments of principal and interest to his “investors.” After the initial disclosure, he met with the government repeatedly, providing detailed records of his fraud and the victims in at least thirty meetings without any assurances of leniency.