Many investors only learn that they have been a  Ponzi scheme victim after the investment goes bust. Of course, some have received more notoriety than others, like Bernie Madoff or Allen Stanford who were both jailed for scamming investors out of billions of dollars through relatively simple scams. Ponzi schemes are easy to perpetuate because they appear to be legitimate to investors who receive the so-called “profits.” In truth, these profits come from later investors whose money is used to pay the earlier investors.

 Ponzi schemes and other related financial fraud cost investors billions of dollars a year. Their victims range from ordinary people to high-level executives and business people. It seems that no one is immune from a well-sold investment scam. This is particularly true when a potential investor has friends or colleagues who have invested. Word-of-mouth endorsements of a “successful” or “profitable”  investment or a financial advisor from someone you know can go a long way in legitimizing a scheme. 

In its most basic form,  the functioning Ponzi scheme pays returns to old investors with cash from newer investors down the line. Of course, a  constant flow of new investors is what is needed to keep the scam going. Once the source of new investors dries up,  the scheme collapses and is uncovered when investors stop being paid or are unable to make withdrawals from their accounts.

Fraudsters running these financial cons use remarkably similar bait to lure potential investors. In the book The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims by law professor Tamar Frankel, there are four warning signs that are similar to most Ponzi schemes:

1. High return! Low risk! Those familiar with investing know that investments that pay higher returns generally require higher risk. If an investment is presented promising a big return with little downside, this is a red flag.  Also, beware the close cousin– Incredibly consistent returns year after year whether the market goes up or down. Bernie Madoff famously did this by creating false returns of the same percentage amount every year. Because this amount was not astronomical and was attained year after year on fictitious account statements, it was believable. Similarly, Woodbridge Securities was charged by the SEC for doing the same thing- promising mostly senior investors consistent returns of between 5-10% a year.

2. The Explanation of the Investment is Complicated.  Fraudsters often weave complex stories to explain their high returns or special skills. The original con man for whom the scheme is named, Charles Ponzi, told his victims that he invested in international postal-reply coupons — which at the time could be sold for multiple currencies—thus making money on the exchange value. Allen Stanford claimed to invest in off-shore CDs where he represented larger but safe, returns could be made outside of the U.S. Complex trading strategies are also sold by scammers who represent that their special skills or knowledge can reap extraordinary benefits.

3. It’s illegal, but it’s okay. Ponzi schemes are often very up-front about concealing things from investors. The reasons given may be concerns about competitors so that confidentiality is required. Sometimes they might offer to return money to nosy or inquisitive investors to keep the lid on their scheme.

According to Professor Frankel, some con artists hawk “safe illegality” which are investments that supposedly succeed by evading taxes or other laws, for example. This approach explains why it needs to be kept secret and makes it harder for the victims both to investigate or complain.

4. You’re Lucky to get in on the Investment Because they Don’t Need your Money. Ponzi schemes often make it seem like they’re reluctant to take your money, which can make their scheme seem less suspicious. Often, they will use safe-sounding terms such as “bank,” “trust,” “CD,” “guarantee,” or “full faith and credit,” to lend credibility and an air of security to the investment. Many of the Ponzi schemers infiltrate clubs or religious groups to market their investments to big groups of people. They create an air of confidence in their abilities and are often charismatic. As Professor Frankel states: “con artists remind us of honest people. They are similar to entrepreneurs, eternally and unshakably optimistic, and they act like (and are) gifted salespeople.”

The Ponzi scheme is one of the oldest types of investment fraud, and it keeps showing up in more creative and innovative ways. In our law office, we have seen almost every type of investment scam and, with so much new happening in the world of investments with digital currency, online brokerage firms, and virtual financial technology, the schemes are becoming more and more complex–although the basic principles remain the same—A fraudster is taking investor’s money through false promises and using it for their own purposes and to pay other investors to keep their securities fraud scam going. 

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Not everyone who loses money in investment has a valid securities fraud claim. However, under certain circumstances where misconduct or violations of securities laws and rules have occurred, investors may have the right to seek legal recourse. If you or a loved one have suffered investment losses as a result of an investment scam, Ponzi scheme or any other type of investment fraud or broker negligence, contact the offices of Investment Fraud lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney, Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 844-635-1609 or 305-349-2336