How to Recognize a Ponzi Scheme

For many people, by the time they realize they have invested in a Ponzi scheme, it’s too late. They have already lost their money and are wondering how they fell for such an investment scam.

Before you are able to recognize the warning signs of a Ponzi scheme, it is important that you understand what this type of fraud entails. Charles Ponzi was one of the most notorious people who participated in this type of scam, which is why it was named after him. Basically, he collected money from people who wanted to invest in his business and then paid investors large interest payments from the money he obtained from the new investors. While Ponzi didn’t create this form of investment fraud, his operation was the first to become known in the United States.

Ponzi schemes can sometimes be difficult to identify. One of the most recent examples involved a man from Santa Ana, California, who allegedly used the money that was received from new investors to make payments for principal and interest to previous investors. The earlier investors believed that they were receiving returns on their investments. This scam reportedly cost investors $14.5 million. Unfortunately, this case is not isolated, as there are regularly reports of Ponzi schemes resulting in financial loss.

If someone has approached you about investing money, you need to be cautious and do some research. Below are steps you can take to avoid a Ponzi scheme:

• Check out the credentials and background of the person who has approached you about the investment. You can check the company out with the Better Business Bureau. If the person is a broker, you can use his or her CRD number to gain more insight into the broker’s record.

• Have an attorney review any contracts that you are given. Don’t send any money until you have had the contracts analyzed.

• Be cautious if a money manager wants to be your custodian. A custodian is a broker-dealer that maintains investment accounts. If a money manager asks you to write a check directly to him or her, that could be a red flag. It would be better to write the check directly to the custodial firm.

• Make sure you understand your investment. If the investment appears complicated or if it cannot be properly explained, you may not want to hand over your money.

• Trust your instincts. There are times when your instincts will tell you something is wrong. If you don’t feel comfortable about an investment, walk away.

If you suspect that you have lost money in a Ponzi scheme, contact the law firm of Meyer Wilson for a free case evaluation. An investment fraud attorney from our office may be able to help you.

For more information, call us at 1.866.827.6537 or fill out our online form.