A Ponzi scheme occurs when a scammer uses funds from new investors to pay the returns to existing investors. There is no real money being generated and when the scammer is unable to get more new investors, the scheme eventually falls apart. Being able to recognize this type of investment fraud is imperative if you want to avoid losing thousands of your hard earned money to a scam. The United States Securities and Exchange Commission (SEC) has laid out warning signs to alert potential investors to a Ponzi scheme.
The warning signs of a Ponzi scheme
A Ponzi scheme uses complicated or secret investment strategies. Some of the most infamous Ponzi schemers include Sam Israel, Bernie Madoff and Martin Frankel. They claimed that they had access to special financial instruments and trading models that were not available to the public. Their investment strategies were secretive and very complex. Again, if the investment model of a particular investment is too complex to understand, it might be a warning sign that it is a Ponzi scheme.
Promises of high investment returns with very little to no risk
Ponzi schemers oftentimes promise a large amount of return for little or no risk. Sometimes the scammer will guarantee a high rate of return and claim the investment model is foolproof and sure. But the higher the rate of return means the higher the risk. Therefore, if an investment promises a high return without risk, there is a good chance it might be a Ponzi scheme.
Strangely consistent return rates
Investment values with higher returns usually fluctuate as the market value rises and falls over time. But Ponzi schemes often generate positive and regular returns no matter what the overall market value is. Unusually consistent return rates could alert you to a potential fraud.
Unlicensed sellers
Under federal and state securities laws, individuals, companies and others who sell in the investment market need to be licensed and registered. If you are looking into investing in a company, you should make sure it is licensed with the proper state or federal entity. If your research reveals that the seller for the investment is not licensed, you need to avoid becoming involved in the investment.
Unregistered investments
Federal laws require that all investments should be registered with the SEC. They need to be registered with state regulators as well. Registered investments bring information to potential investors, financial status, including key data regarding the services, management of a particular company and products. If no information is provided and the investment isn’t registered, it might be a sign that it is a Ponzi scheme.
Payment issues
Those involved in Ponzi schemes might have difficulty receiving payments for promised returns. They might also have trouble cashing or withdrawing money from the account. Since Ponzi schemes rely on money from new investors to pay off the existing investors, problems involving payments may be a warning sign.
Paperwork issues
Ponzi schemes oftentimes do not provide detailed information up front to potential investors. Also, investment fraud scams might have errors and inconsistencies in the account information that an alert investor can notice. If you have trouble getting information about the account or the information provided does not seem quite right, you might be looking at a Ponzi scheme.
How to Avoid Becoming a Victim to a Ponzi Scheme
If you would like to avoid Ponzi schemes or any investment fraud scam, there are certain steps you could take. Initially, you need to exercise common sense and avoid any investment that exhibits the above warning signs of fraud. If you are a new and inexperienced investor, it is important to be careful and wary of unbelievably good investments.
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