Don’t Be the Victim of a Ponzi Scheme

The saying goes ‘if it is to good to be true, it probably is, and a person who is behind a Ponzi scheme hopes that your philosophy is based on GREED, so don’t be the victim of a Ponzi Scheme! After all, a fool and his money are soon departed!

Simply defined, a Ponzi Scheme is a so called investment where the mastermind promises returns on investments, which are usually higher than almost anyone else can realistically promise. Keep in mind a HUGE gap between their estimates and everyone else’s.

Operators of Ponzi schemes entice their investors by offering higher returns on their investments, in the form of short-term returns that are either abnormally high or unusually consistent or both. However, what is really happening is that the returns to the investors are actually from new capital paid to the schemer by new investors, rather than from profit earned by the actual operation.

The most well known modern day mastermind of a Ponzi Scheme is Bernard Madoff. However, while he may be the best known, there are many others. These schemers are usually very personable, friendly and outgoing. THEY ARE GOOD SALES PEOPLE and work on many levels. They ARE NOT usually associated with known and reputable brokerage companies. They are often dealing with stocks that are not traded the way mutual funds or stocks are supposed to be traded.

The Ponzi scheme usually begins as the fraudsters draw their initial investors in with grand promises of liquidity and above average returns. In the beginning, these initial investors usually obtain these promised returns, and sometimes even returns better than those that were promised. Then the initial investors unknowingly become the fraudsters’ best sales people by going to their family and friends telling them to invest with this schemer because, after all, they are getting such great returns.

The success of the Ponzi Scheme to the schemer is the continued perception of the high guaranteed returns. Bernie Madoff was a master of this lie. However, to “insure” these high returns, an ever-increasing flow of money from new investors is absolutely necessary. This is the lifeblood of the Ponzi Scheme.

A fraudster depends on the initial investors to sell the product for him or her. As the scheme pays out based on these unrealistic promises, more and more “investors” are needed.

It is simple math. If you are promising to pay a 15% return and the actual return is 5%, in order to pay the 15%, you have to make the payout from principal.

Let’s look at numbers. The “fund” has $1,000,000.00 of investor’s money and has an actual return of 5% or $50,000.00. The investors have been promised a guaranteed return of 15% or $150,000.00. The only way the schemer can continue to get new investors is by actually paying out the $150,000.00. However, in order to be able to pay put the guaranteed return is to use $100,000.00 of principal to pay out the guaranteed return.

After all, if the schemer misses the guaranteed payment, those investors will be less likely to talk to their friends and family about investing with the fraudster. They may even want to “cash out”.

How does the schemer replace the misappropriated principal with money?

By getting more money, new money, from new investors, or hoping that the investors want to “reinvest” their guaranteed return. And who are these salespeople? These unwitting salespeople are the investors who have been getting such unrealistic returns on their investment.

As time goes on, and more and more of the guaranteed returns are being paid out, the more new money is needed to sustain the Ponzi, or pyramid scheme. Eventually, the scheme sinks under its own weight and collapse. The victims always ask how could this happen and what were the signs they missed.

What are some of the signs to signal that you may be invested in a Ponzi Scheme?

After all, you are getting the return promised. The most obvious sign would be any “delay” in redeeming your investment, or “cashing out”. If you are supposed to receive regular dividends or interest payments, and you do not receive them on a timely basis, be wary. The same is true if you are having difficulty in redeeming or “cashing-out” your investment. A big, bright red flag should go up as soon as you are told by the fraudster that, “this is not a good time to redeem,” or “that the assets in the fund are not liquid right now.”

If the market is going down, but your return is remaining the same, or your return is going up, there is usually something wrong.

Do not buy into the sales pitch that the schemer knows more than everyone else. You should remember, that while it may be the case for the very short term, it certainly is not the case over the long term.

Another indicator that you may be unknowingly part of a Ponzi Scheme is that you cannot INDEPENDENTLY verify the funds, or the fund is not “listed”. This is not to say all funds that are not listed are Ponzi Schemes, and this is not definitive that you are invested in a Ponzi Scheme, but should be taken in conjunction with other signs.

Can you speak to the accountant or auditor of the fund?

If not, why not? NEVER be afraid to ask questions?

If you cannot get answers to basic questions, don’t be afraid to inquire further. Contact the S.E.C. Check to see if there are other complaints against this fund or the individuals running it or responsible for managing the funds.

Always ask for all documentation outlining the funds, goals, and investment strategy. Check the names of ALL of the people listed in the documents.

A simple initial inquiry is to “Google” the name of the people listed. You will be surprised what you may learn. If “job description” is listed without the name of the person, be careful. There is a reason why the documents do not list the name of the people who are involved. In most cases, they have had issues or prior problems with the S.E.C. or other government agencies.

Most importantly, if a payment to you, for your guaranteed return or redemption, bounces or is Post Dated, GET OUT AND IMMEDIATELY GO TO THE APPROPRIATE AUTHORITIES!

Be a smart investor. Don’t fall for those unrealistic returns. Remember, a fool and his money are quickly departed.Don’t be that fool. BE VIGILANT!


“Don’t Be the Victim of a Ponzi Scheme” was written by Michael B. Schulman, Managing Attorney

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