What Is a Ponzi Scheme?

A Ponzi scheme is an investment fraud that involves the payment of returns to investors from funds contributed to the scheme by new investors. There is often little or no legitimate investing occurring or profits being made. Fraudsters often solicit new investors by promising high returns with little or no risk, a red flag that is often over looked by investors. Because it can be hard to say no to someone you trust when the opportunity sounds so promising.

With little or no legitimate earnings, Ponzi schemes require a constant influx of money from new investors to continue to operate the scam. This is way the Ponzi scheme always collapse at some point. This happens when it is difficult to recruit new investors or when a large number of investors request their principle investment back. At that point the investors usually become aware that something is wrong. Their return checks might start to bounce or they cannot get in touch with the Ponzi scheme promoter any longer.

With the rise of Ponzi schemes in recent history, the terms Ponzi scheme and Pyramid scheme are often used interchangeably. There is a difference between the two, however. In a classic Pyramid scheme you generally pay into an offer that claims you can make money for yourself by recruiting more people into the scheme. The people you recruit will then pay their portion to you and so on. In a Ponzi scheme, although the structure seems very similar, you aren’t usually required to do any more work than just handing over your money to be invested. This is part of what makes the Ponzi scheme so effective. You usually aren’t told of the need for the additional recruits to keep the scam rolling. The Ponzi schemer takes your money and promises to do all the work for you. And they’re often long gone before you realize what’s happening.

The securities fraud lawyers at Meyer Wilson devote their practice to representing investors who have claims against stockbrokers, financial advisors, and their brokerage firms. We have represented hundreds of individuals in cases where their broker recommended they invest in what turned out to be Ponzi schemes. Meyer Wilson encourages you to explore this website and learn more about securities fraud and the process of recovering investment losses. If you would like to learn more about how the firm may be able to help you recover your losses please call us directly at the toll free number or submit the online form.

David Meyer has published an article on the aftermath of a Ponzi scheme for the American Bar Association. You can read the article here.