What is a Ponzi Scheme?

In a classic Ponzi scheme, the scammer uses funds from new investors to pay the so-called “ returns” to existing investors. There is no real money being made by investing, it is simply new money from the new investors being paid to old investors. Once the scammer is unable to get more new investors, the scheme will fall apart. In times of stock market volatility or economic downturns, often investors need to get money back from their investments. During an economic decline, the investor in a Ponzi scam cannot get their money back since no new money is flowing in. This is the most typical way that a Ponzi scheme is exposed. 

Even before the COVID-19 market crash, investor money caught up in alleged Ponzi schemes had hit its highest level in a decade. This fact has regulators worried that a booming stock market and deregulation caused more fraudsters to swindle unsuspecting investors. Just last year, state and federal authorities uncovered 60 alleged Ponzi schemes with a total of $3.25 billion in investor funds — more than double the amount from 2018, according to data from the website Ponzitracker.

The Financial Industry Regulatory Authority (“FINRA”) has laid out 7 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 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.” 

Seniors are Often Preyed Upon by Fraudsters

As reported by the SEC, Seniors are often the target of fraud and Ponzi schemes. However, with some basic understanding of how scam artists work, you can avoid fraud and protect your hard-earned money. Learning how to invest safely can make a huge difference in your retirement years. Seniors are particularly vulnerable to scam artists who are “nice” or attempt to develop a false bond of friendship. Scam artists prey on seniors who are polite and have difficulty saying “no” or feel indebted to someone who has provided unsolicited investment advice.

What Can Seniors Do to Avoid Being Scammed? 

The SEC recommends the following: 

Ask questions and check out the answers. Fraudsters rely on the fact that many people simply don’t bother to investigate before they invest. It’s not enough to ask a promoter for more information or for references—fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research and talk to friends and family first before investing. Make sure you understand the investment, the risk attached, and the company’s history. And remember, if the investment sounds too good to be true, it is! 

Research the company before you invest. You’ll want to fully understand the company’s business and its products or services before investing. Before buying any stock, check out the company’s financial statements by using the SEC’s EDGAR database or contact your state securities regulator. Remember that unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions. 

Know the investment professional. Spend some time checking out the person touting the investment before you invest—even if you already know the person socially. Always find out whether the person who contacts you is licensed to sell securities in your state and whether he or she or their firms have had any trouble with regulators or other investors. You can check out the disciplinary history of an investment professional quickly—and for free—at Investor.gov. 

Never judge a person’s integrity by how he or she sounds. Successful con artists know how to sound professional. They can make even the flimsiest deal sound like a “sure thing.” Con artists know that the appearance of professionalism combined with polite manners or overtures of friendship may lead many older investors to accept their advice

Watch out for investment professionals who prey on your fears. Con artists know that many seniors worry about the adequacy of their retirement savings, especially if they are faced with costly medical expenses. As a result, fraudsters often pitch schemes offering unrealistically high rates of return. 

Take your time—don’t be rushed into investment decisions. Just because someone you know made money, or claims to have made money, doesn’t mean you will too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information. Remember that a fraudster does not want you to think too much about the investment because you might figure out the scam.

 ■ Be wary of unsolicited offers. Be especially careful if you receive an unsolicited phone call or email about a company—or see it praised on an Internet bulletin board—but can find no current financial information about the company from other independent sources. Many fraudsters use email and Internet postings to tout thinly traded stocks, in the hopes of creating a buying frenzy that will push the share price up so that they can sell their shares. Once they dump their stock and quit promoting the company, the share price quickly falls. And be extra wary if someone you don’t know recommends foreign or “off-shore” investments. When you send your money abroad, and something goes wrong, it’s more difficult to find out what happened and to locate your money. 

Don’t lose sight of your investments. Don’t rely on an investment professional who says “leave everything to me.” Always monitor the activity on your account and request regular statements. You should never feel uncomfortable about questioning any trading activity that you don’t understand. Remember— it’s your money. 

Question why you cannot retrieve your principal or cash out your profits. If your investment professional stalls when you request your principal or profits, this may be because that person has already pocketed your money. Don’t be fooled by explanations as to why your money is inaccessible or by suggestions that you roll over your “profits” into other investments. 

Never be afraid to complain. If you suspect fraud or a questionable practice and the explanations that you receive are not satisfactory, do not let embarrassment or concern that you will be judged incapable of handling your own affairs prevent you from filing a complaint with the SEC, FINRA, or your state securities regulator. 

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.

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 you are an investor who has experienced investment losses which you believe was a result of the misconduct of a broker or seller, please call us at 888-768-2499 or complete our contact form for a free consultation.