We’ve been hearing a lot about Ponzi schemes in the last few years. Although most people understand that Ponzi schemes are a type of investment fraud, not many really understand exactly how these scams work. It is precisely because so few people understand the inner workings of a Ponzi scheme that so many investors are bilked out of their cash.
Understanding how a Ponzi scheme works will help you recognize when you are being scammed and avoid falling for the trap. At Meyer Wilson, we have a long history of helping people pursue compensation after being taken in by a Ponzi scheme or other form of investment fraud.
Contact us today to schedule a free consultation with an investment fraud lawyer from our firm.
How Can an Investment Fraud Attorney Help Me?
Investment scam attorneys practice a narrow and specialized field of law. Not every lawyer has the experience necessary to help you recover damages in a Ponzi scheme case. In deciding which law firm to hire and to help you recover the money that has been wrongfully taken from you, it is important to consider the following:
- The firm’s experience with Ponzi scheme cases
- The firm’s available resources to help you win your case
- The reputation of the firm
For Ponzi scheme victims, an experienced investment fraud lawyer is able to:
- Investigate your account activity for signs of a scam
- Detect and identify the investment scam
- Determine the parties who may be held responsible for the scam
- Access your advisor’s complaint history and background
- Understand the Financial Industry Regulatory Authority (FINRA) rules and walk you through the arbitration process
At our firm, we handle investment fraud cases involving investment professionals who defraud their clients. We do not handle cases involving fraud committed by individuals not associated with a brokerage firm.
Charles Ponzi: 1920’s Pyramid Scammer
The Ponzi scheme is named after Charles Ponzi, who pulled off his namesake pyramid scam in the 1920s. He promised investors a 40 pence return on mail coupons over three months, compared with the five pence that could be earned in a savings account.
Unfortunately, Mr. Ponzi only actually purchased about $30 worth of mail coupons, although he took in over a million dollars from investors. The structure of the scam was not a new one, but Mr. Ponzi’s scheme was on such a large scale and took in so much cash that it has since been named after him.
How does a Ponzi Scheme Work?
A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by later investors rather than from actual earned revenue. These scams are similar to pyramid schemes, except that they do not require investors to recruit others to invest.
These types of schemes are illegal and continue to operate on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off the previous investors in a continuous and destructive cycle until the whole scheme eventually falls apart when not enough new investors can be found.
The investment opportunity may have been a genuine opportunity that did not work out as the promoter had planned, or the entire operation may have been a fraud from the start. This uncertainty, coupled with the fact that many initial investors are paid “returns” at the beginning, makes it difficult for investors to realize the scheme for what it is until it is too late.
Steps of a Ponzi Scheme
The steps of a Ponzi scheme seem simple enough. When setting up this type of fraud, a scammer will:
- Come up with an enticing investment premise that offers great imaginary returns
- Convince a few investors to put money into it
- Hold on to the money for a period of time
- Return that money to the investors as the promised “returns”
- Convince your original investors to reinvest since they “made money” the first time
- Entice new investors with the same promises and point to prior investors as “proof”
- Use some of the new investors’ cash to continue to pay off other earlier investors
- Profit and repeat for several years
- Stop returning phone calls and disappear with the cash
It’s scary how simple Ponzi schemes are and how often they work. Ultimately, though, these scams are doomed to fall apart when the money coming in can no longer support the payouts on investments, and there are big consequences for the fraudster and the victims.
Although some Ponzi schemes stretch over 10 years or more and involve thousands of investors and millions of dollars, they always collapse eventually because the number of new investors needed to support them becomes a mathematical impossibility. By the time the investors find out, however, the fraudster is usually long gone.
How to Avoid Ponzi Schemes & Other Scams
We have seen just about every trick in the investment scam book. Learning to recognize the way fraudsters operate can be a big step toward avoiding Ponzi schemes and other scams.
When selling a “lemon” to an investor, the fraudster will likely promise high returns. While this can sound enticing, it is critical that you realize that if an investment opportunity sounds too good to be true, it probably is. Use caution and consult an outside financial advisor before investing your money.
You should also be wary of any investment opportunity where you are not provided with thorough documentation of the investment structure. The lack of information or numbers that don’t seem to add up are likely signs that the investment is not sound.
Know When to Make the Call
The first step in getting your money back is partnering with an experienced attorney who is willing to fight for you. You will know that the time is right to call an investment fraud lawyer when:
- You recognize the warning signs of a Ponzi scheme
- You discover you have lost money in a Ponzi scheme
- You are contacted by another victim or a victim’s attorney
Early signs that the scheme is beginning to collapse may include diminished rates of return on your investment. If you were victimized, an experienced investment fraud attorney from Meyer Wilson can help. As the catastrophic losses suffered by the varied investors defrauded in the recent Bernie Madoff Ponzi scheme illustrate, anyone can be a victim, including:
- Individual Investors
- Retirees
- Small Businesses
- Corporations
- Pension Funds
- Institutional Investors
Get Started With a Free Consultation Today
Best Lawyers has honored David P. Meyer and Matthew R. Wilson as “Lawyer of the Year” in their respective practices, an elite recognition based exclusively on peer review. The annual award is given to only one lawyer per practice area in each region. When you hire Meyer Wilson, you can rest assured that we:
- Are devoted solely to investor claims and class actions
- Are nationally recognized for our work with investors
- Only earn a fee if your losses are recovered
- Will assign two lawyers to your securities fraud case
- Employ a full-time investigator
Regardless of whether the promoter meant to defraud from the beginning or if market conditions affected a once legitimate investment opportunity and the promoter continued to push the investment knowing they were defrauding investors, unsuspecting investors who invest in Ponzi schemes often suffer massive financial losses when the scheme collapses.
When this happens, our team can step in and hold the financial institutions that employ and support the fraudsters accountable. When choosing a securities attorney, results matter. Our firm has recovered more than $350 million on behalf of our clients. View other case results.
For assistance with your securities fraud claim, call us for a free case evaluation.