How to Spot a Ponzi Scheme Before It's Too Late

What is a Ponzi? A Ponzi scheme is an old, infamous type of fraud that is still surprisingly used successfully daily to entice unsuspecting people. It works by defrauding new investors of their contribution to pay old ones while investing very little to no money.





What Is a Ponzi Scheme?

To recognize a Ponzi scheme, you need to understand what it means and how it operates. Ponzi got its name from an infamous scammer, Charles Ponzi, who defrauded investors in England in the 1920s. Charles had promised the investors a 40% profit on their investments in 90 days. Charles was not the initial inventor of this type of investment scam, but his operation was the first known case in the United States.


A Ponzi scheme refers to an investment scam where customers are falsely guaranteed an enormous return at little to no risk. Companies involved in Ponzi schemes aim to acquire many new clients to amass significant contributions used to pay the profits of the initial investors. The investors believe that this money is from interest realized from a legitimate investment.

Much like pyramid schemes, the Ponzi scheme works the same way, the only difference being the kind of products offered and the structure of the two ploys.


Red Flags of What Is a Ponzi Pyramid Scheme

Many people have fallen victim to Ponzi schemes over the years as they are very enticing. This is why we need to know how to recognize them. Most Ponzi scheme victims are novices when it comes to investment knowledge. It is, therefore, essential to verify the legitimacy of both the promoter and the investment.

Let’s look at some of the red flags you need to look out for:


1. Abnormally high guaranteed returns, low risk

The most evident sign of fraud is high returns on investment with low risk. Typically, high investment equates to high risk, and that's how most financial investments work. So, you should be wary of such lofty promises when looking for investment opportunities.



2. Consistent returns through all market conditions

Investments tend to go through highs and lows. So, when you come across an investment that guarantees steady returns despite the market's general condition, you should be very skeptical.


3. Unregistered investments

Legitimate investments are registered with the SEC or state regulators so that investors can access the company’s information, such as its management, products, and even finances. To protect your hard-earned money, always confirm the registration status of the investment.


4. Unlicensed sellers

It is a requirement by the federal and state laws that all dealers and companies in the investment business register and apply for licenses. Therefore, it is vital to verify the status of the people you are dealing with.


5. Vague business strategies

Warren Buffet once said you should never invest in a business you do not understand. A common characteristic of a Ponzi scheme is complex and or secret business models and strategies. You should be able to explain what you are investing your money in and how it generates returns. If not, then maybe investing in it is not a good idea.


6. Pressure to reinvest

Ponzi schemes only stay afloat when investors do not pull out their cash. Instead, these fraudsters tend to put pressure to reinvest with the promise of higher returns. You get a sense of pressure like it's the opportunity of a lifetime. This is definitely a red flag if you know “what a Ponzi scheme is for dummies.”


Protect Your Rights

Ponzi schemes are unfortunately common in the U.S. If you ever find yourself in such a situation, the first course of action is to get in touch with an expert investment fraud attorney. The earlier you voice your concern, the sooner it is easier to preserve the evidence needed for the case. Remember to choose the best legal representation as it establishes an effective legal strategy.


Resources to report fraud:


Financial Industry Regulatory Authority 9509 Key West Avenue Rockville, MD 20850-3329 Phone: (301) 590-6500 – for all investors Toll-Free: (844) 57-HELPS / (844) 574-3577 – FINRA Securities Helpline for Senior InvestorsTM


U.S. Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy 100 F Street, NE Washington, DC 20549-5631 (800) SEC-0330


North American Securities Administrators Association Find contact information for your state-specific securities regulator. (202) 737-0900


National Association of Insurance Commissioners Find contact information for your state-specific insurance regulator, report fraud, or file a complaint.


National Futures Association Compliance Department – Customer Complaints 300 South Riverside Plaza, Suite 1800 Chicago, IL 60606 (312) 781-1467


U.S. Commodity Futures Trading Commission Office of Cooperative Enforcement 1155 21 Street, NW Washington, DC 20581 (866) FON-CFTC / (866) 366-2382


Internet Crime Complaint Center A partnership between the FBI and the National White Collar Crime Center


Sources:

www.investorclaims.com/library/how-to-recognize-a-ponzi-scheme

www.fool.com/retirement/2017/01/30/how-to-spot-a-ponzi-scheme.aspx

www.moneyweb.co.za/financial-advisor-views/how-to-identify-a-ponzi-scheme

www.fifthperson.com/5-red-flags-to-spot-a-ponzi-scheme

www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme

https://www.saveandinvest.org/protect-your-money-report-fraud/reporting-investment-fraud



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