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How a Ponzi Scheme Manages to Look Legitimate to Victims

By September 12, 2018Ponzi Scheme

There is little shame in falling prey to a Ponzi scheme in 2018.  Most of these scams appear completely legitimate on the surface.  If you do not invest the time and effort required to research prospective investments, there is a good chance you will be victimized by the many fraudsters looking to make a quick buck.  Even some professionals who have worked in finance for decades lose tens of thousands of dollars to sophisticated Ponzi schemes.

The Dynamics of Ponzi Schemes

Ponzi schemes fool investors into thinking they will make a considerable amount of money on an investment.  In reality, the supposed investment does not exist.  Rather, investors are actually paid with cash provided by fellow victims who recently signed up for the program.  Such a scheme can continue indefinitely as long as the operators continue to lure new victims into the fold.  The scheme appears to be a legitimate investment opportunity as those who sign up are eventually provided with a return on their investment.  This cycle of fraud comes to an end or significantly slows when the operators find it difficult to enroll new victims.

How Ponzi Schemes Look Legitimate

Part of the appeal of seemingly legitimate investments that are actually Ponzi schemes is the fact that the operators can show valid returns paid to existing investors.  This proof of payment makes the entire operation seem somewhat credible.  Plenty of fraudsters will go as far as detailing a highly complex investment strategy to intentionally confuse investors.  Some provide a complicated offering that most prospective investors are only willing to analyze on the surface.  After all, if an investment seems overly-complex, plenty of people will simply assume it is beyond their comprehension and refuse to perform any research.

Ponzi scheme operators will craft fake account statements that look quite real.  These false account statements are transmitted to clients to create the impression that their investment is succeeding when the truth is there is no investment.  Phony account statements are not difficult to produce with today’s technology.  Some Ponzi scheme operators even go as far as hiring friends and family to pose as successful investors who have benefited from the proposed investment.  This small amount of supposed evidence often proves enough to make it appear as though the investment actually exists and generates considerable returns. 

Tips to Avoid Ponzi Schemes: Be Patient and Perform Research

Take some time to analyze the proposed investment to determine if it is valid.  It will not take long to determine if the individual or group offering the investment is registered to sell the investment in your state.  If the individual is a broker, look up his or her CRD number to find out more about past performance and legitimacy.  If the group or individual has a history of complaints or disciplinary action with the Better Business Bureau or another watchdog group, steer clear! 

Ask for Clarification

Do not hesitate to ask the group to explain the investment model in layman’s terms everyday people can understand.  If the investment still seems confusing after it is communicated, do not invest a single penny. 

Request Documentation to Fully Understand the Alleged Investment

Ask for proof of returns and additional documentation to prove the investment’s legitimacy.  If the documents provided seem illegitimate in any way, do not invest.  It will also help to run these documents by your attorney or financial advisor.  These professionals have analyzed countless financial documents.  They know exactly what to look for when gauging the legitimacy of prospective investment opportunities.

Beware of Those Looking to Become Your Custodian

Custodians are broker-dealers responsible for maintaining investment accounts.  Money managers who request that a check be written directly to them are cause for concern.  It is always better to make out a check to a custodial firm as opposed to an individual custodian.  Custodial firms are more likely to be legitimate as they are groups as opposed to individuals.  Above all, you should trust your instincts.  If you do not understand the investment or do not feel comfortable when interacting with the salesperson, walk away and do not look back.

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