The Ponzi scheme is a notorious type of securities fraud, and for good
reason. Because it functions by paying off newer investors with money
from previous investors while little to no actual investing is going on,
everything looks to be on the up and up. Although eventually every Ponzi
scheme will run out of new investors to dupe, many of these scams can
run for a long time.
So what is a wise investor supposed to do? If a Ponzi scheme is so undetectable
that newer investors are being paid and previous investors are able to
say they've received the "promised" returns, how can an
average investor sniff out a fishy deal? As securities fraud attorneys,
we'd like to say that, luckily, with a little education, any investor
can be wise to the biggest red flags.
What Is a Ponzi Scheme?
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 be difficult to identify. One of the most recent examples
involved a man from Santa Ana, CA, who allegedly used money 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.
Red Flags of a Ponzi Scheme
When you are looking into a new investment opportunity, it's important
to take the time to check out both the person offering the investment
and the investment itself. Verifying that both the promoter and the opportunity
are legitimate can save you a lot of time, money, and heartache.
Any person offering an investment should:
- Be registered to sell investments in your state
- Have a history that is clear of any disciplinary action or a pattern of
- Be able to explain his or her investment model to you in terms you understand
- Be willing and able to provide all of the documents and information you need
Beyond checking out the person offering the investment, you should also
look into the actual opportunity itself. If an opportunity features the
following, it could be a Ponzi scheme:
"Guaranteed" High Returns
Any investment with “guaranteed” high returns should be carefully examined.
Excuses about missing paperwork, errors, or secretive strategies are red flags.
Consistent High Returns
Be cautious of investments that generate high returns unaffected by the market
Most cases of investment fraud involve investments that have not been
Many Ponzi schemes involve unregistered firms and/or unlicensed individuals.
Pressure to Reinvest
Ponzi schemes collapse without regular income or when too many investors cash out.
Steps 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 BBB. 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 by
a lawyer that you can trust.
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 them, it is a red
flag. It would be better to write the check 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.
Take Action to Protect Your Rights
The first step you should take if you suspect a Ponzi scheme is to contact
an experienced investment fraud attorney. Failure to do so may result
in evidence becoming too obscured to properly establish your case. An
attorney will take the time to go through your options and determine the
best course of action. Choosing the right legal representative is not
easy. However, it is absolutely critical in establishing an effective
The right law firm should possess the following qualities:
- Established, recognized experts in investment fraud cases
- Track record of successful outcomes in investment claims
If you believe that you may have been the victim of a real estate Ponzi
scheme then it is important to contact an experienced investment fraud
attorney. Meyer Wilson has successfully represented more than 800 investors
in stockbroker mediation, arbitration, and litigation claims.
For more information, call us or fill out our