If you search the news you’re bound to see a new one mentioned everyday. Ponzi schemes.
They seem so obvious, and yet even decades after their creation thousands of people fall prey to this type of fraud each year.
Certainly the ponzi scheme orchestrated by Bernie Madoff raised public awareness of such financial crimes. One would think that should an international story would turn the tide and raise greater awareness of investment fraud.
But ponzi schemes — or investment fraud that happens when a broker pays existing investors with money from new investors — come in all shapes and sizes. They can affect everyone from young professionals to retirees. Ponzi schemes are named after Charles Ponzi, who defrauded thousands of people in New England in the 1920s with a postage stamp speculation scam.
Ponzi schemes can run for months, years, or even decades (see our previous post on what keeps a Ponzi scheme going). But because they have no legitimate income, Ponzi schemes will eventually come to light without a constant flow of new cash from new investors.
What are some signs you have invested in a Ponzi scheme?
Ponzi schemes often share many of the same elements. Here are some signs that you might have invested in a Ponzi scheme:
- Promise of high returns with little-to-no risk: With every investment you make, there is a certain level of uncertainty and risk. Typically, the higher the return, the higher the risk. Investors should be wary of “guarantees” and no-risk investment opportunities.
- Unregistered investments: Not all investments and hedge funds are required to be registered with the U.S. Securities Exchange Commission ( the SEC) or state regulators, but unregistered investment funds can serve as a red flag for a potential Ponzi scheme. Why? Because SEC registration gives investors access to vital information about the investment company’s products, services, financial stability and management practices. Investment companies with nothing to hide will have no qualms registering with the SEC.
- Unlicensed sellers: Although not all funds have to be registered with the SEC, the investment broker or professional selling the fund — and the firm he or she works for — has to be licensed and registered with both the SEC and state regulators. Many Ponzi schemes are run by unlicensed brokers or firms that have not registered with the SEC.
- Consistent high returns: One serious red flag when it comes to investments is overly consistent returns. With most investments, returns fluctuate just like the market, especially the ones that end up reaping the most rewards. Remain vigilant when monitoring returns, and be wary of constant high yields.
- Trouble getting paid: If the investor in question often tries to convince you to “roll over” your investment returns — and then promises even more lucrative returns on the roll over, it’s a sign of a fraudulent investment.
- Overly complicated or private investment strategies: If the investment professional seems very good at confusing you or not answering your questions directly, it’s another sign of a Ponzi scheme. Never invest in something you don’t fully understand. Another sign of a Ponzi scheme is not being allowed to view the investment information or paperwork behind the fund. If there are consistent errors in the paperwork, the fund needs to be scrutinized more.
Don’t let you or someone you love become a victim of a Ponzi scheme. Fishman Haygood has a national reputation for recovering lost investments due to investment fraud or negligence. Contact Fishman Haygood today for assistance.