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Tips for Spotting a Ponzi Scheme

By September 2, 2020 No Comments

Ponzi Schemes are a type of investment fraud made famous by Bernie Madoff, in which the schemer makes payments of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. 

At DVC, we are regularly appointed as receivers on cases where investors have been defrauded by Ponzi schemes. Our job is to represent the victims, recover their funds, and provide reparations.  

Many times, the victims have lost a large amount of money and were woefully unaware of the tell-tale signs of these types of frauds. According to the Securities and Exchange Commission, here are red flags you should look out for to avoid falling into a Ponzi Scheme: 

  1. High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  2. Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
  3. Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
  4. Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  5. Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
  6. Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
  7. Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

*Source: https://www.sec.gov/fast-answers/answersponzihtm.html#RedFlags