During times of economic uncertainty, such as in the wake of the COVID-19 pandemic, creative fraudsters come up with all types of schemes to swindle innocent people out of their hard-earned money.  Almost anyone, no matter how sophisticated or savvy, can fall prey to a financial scam. Financial fraud can often appear completely legitimate on the surface.  Investors should research any prospective investment before it’s made to avoid getting caught up in a Ponzi scheme or any type of investment fraud.

Hallmarks of a Ponzi Scheme

Ponzi schemers generally use the promise of big returns to fool investors.  Usually, the supposed investment vehicle does not really exist.  Rather, earlier investors are paid with new money provided by later investors who are also swindled.  Such schemes continue indefinitely as long as the fraudsters are able to lure new victims into the scam.  The scheme appears to be “legitimate” as long as the investors continue to receive a return on their investment.  Once the source of new investors dries up, and thus no new money comes in to pay the earlier investors, this ultimately exposes the Ponzi scheme.

Ponzi Schemes Appear to be Legitimate Business Enterprises

Why do Ponzi schemes appear to be legitimate? The way that Ponzi schemers make their enterprises look like legitimate investments is that their operators are able to show valid returns being paid to their existing investors.  This track record lends credibility to the entire operation.  In order to confuse investors and to create the appearance of a sophisticated enterprise, fraudsters often present highly complex investment strategies to their victims.  They will often provide complicated offering documents that most prospective investors will only analyze on the surface.  Generally, if an investment strategy seems overly complex, most people will just leave it to the “experts” who are running the scam and not perform any research.

Additionally, Ponzi scammers will often generate fake account statements that look quite real.  The false statements are then transmitted to their clients who are lulled into believing that their investment is both profitable and safe.  When one investor believes that they are making money, and then tell their friends of their success, this helps to propagate the fraud and recruit more victims. This will often happen in an “affinity fraud” situation where members of a church, club or ethnic group all invest with the same fraudster.  

Recent Ponzi Schemes Have Involved  Virtual Currency

According to the SEC, recent Ponzi scheme organizers use the latest innovation, technology, product or growth industry to entice investors and give their scheme the promise of high returns. Potential investors are often less skeptical of an investment opportunity when assessing something novel, new, or “cutting-edge.” You should look out for potential scams using virtual currency.  Virtual currencies, such as Bitcoin, have recently become popular and are intended to serve as a type of money. they may be traded on online exchanges for conventional currencies, including the U.S. dollar, or used to purchase goods or services, usually online. The SEC is concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulently, or simply fabricated, investments or transactions. The fraud may also involve an unregistered offering or trading platform. These schemes often promise high returns for getting in on the ground floor of a growing Internet phenomenon. Fraudsters may also be attracted to using virtual currencies to perpetrate their frauds because transactions in virtual currencies supposedly have greater privacy benefits and less regulatory oversight than transactions in conventional currencies. Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency. In particular, individuals selling investments are typically subject to federal or state licensing requirements.

Tips to Avoid Getting Scammed by a Ponzi Scheme

The Financial Industry Regulatory Authority (“FINRA”) has laid out seven warning signs to  alert potential investors to a potential investment scam:

1. Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way.
2. Unregistered products: Unregistered securities sold by unlicensed individuals are often fictitious.
3. Overly consistent returns: Investments that consistently go up—or provide remarkably steady returns regardless of market conditions—should raise suspicions.
4. Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success.
5. Missing documentation: Be wary if there is no prospectus, offering circular or a stock symbol.
6. Account discrepancies: Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets.
7. A pushy salesperson: No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you must “act now.”

Tools to Check out Your Broker, Firm, and Investment

In order to avoid being the victim of a Ponzi scheme, or any investment fraud scam, there are certain measures you can follow. 

Make Sure to Check out the Seller or BrokerAlways ask whether the promoter of an investment opportunity is licensed to sell you the investment—and confirm which regulator has issued that license AND independently verify the answers.  You can verify the identity and background of the seller or promoter with the following regulators.

BROKER OR BROKERAGE FIRM: use FINRA BrokerCheck www.finra.org/brokercheck

INVESTMENT ADVISOR: use the SEC’s Investment Adviser Public Disclosure www.adviserinfo.sec.gov  

ALL SELLERS: your state securities regulator: Contact the North American Securities Administrators Association www.nasaa.org or  (202) 737-0900 

CHECK OUT INVESTMENTS—Unregistered investments magnify risk because often they offer little or no publicly available information. To check if a product is registered use the SEC’s EDGAR database or contact your state securities regulator. www.sec.gov/edgar.shtml

These tools will help you do research on the broker and investment to make certain that the seller and the product are legitimate and not fraudulent.

Have You Been a Ponzi Scheme Victim?

If you believe that you or a loved one are the victims of a Ponzi scheme or other investment scam, call us today for a free consultation. Former Wall Street Attorney Melanie S. Cherdack represents investors throughout the United States and the Caribbean in claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-768-2499  or complete our contact form for a free consultation.