Ponzi Schemes

The term “Ponzi Scheme” is one of the most commonly known securities fraud phrases. Named after the infamous fraudster Charles Ponzi of the early 20th century, a Ponzi scheme can refer to several types of fraud and manipulation. All Ponzi schemes involve securities activity where funds from new investors are either stolen or given to pay returns to older investors.

The FBI defines a Ponzi scheme as the alleged payments of dividends to initial investors using the proceeds obtained by new investors.

Ponzi schemes vary in both size and legitimacy. For example, an investment with a Ponzi schemer could be completely fictitious or have some real underlining investments. A completely fictitious scheme occurs where a person represents to an investor that the investment will yield a certain return and the Ponzi schemer combines the investor’s money with the money of other investors in order to repay the interest only. There is never any “real investment” and the majority of the investor’s principal is stolen by the Ponzi schemer.

In other schemes there are legitimate investments but large portions of investor capital are wrongfully diverted to the Ponzi schemer causing the investors to be deprived of their full investment. In addition, the value of the investor’s securities are often manipulated and inflated by the Ponzi schemer in order to lull the investor into a false sense of security. Finally, there are schemes where a series of investments are represented as being wholly separate investment vehicles. However, the funds for all of the investment vehicles are commingled and loaned between the entities as needed in order for the Ponzi schemer to continue the wrongful investment activity.

There are numerous “red flags” that investors should be looking out for before investing to avoid Ponzi Schemes. One red flag is the promise of no risk with high returns. Every investment has risk, so when a Ponzi scheme is presented to investor, the investor should be suspicious if the investment has a high return and little to no risk.

Other “red flags” investors should look for to spot a potential Ponzi scheme are very consistent returns during times of market volatility. No investment is perfect when the market is volatile so are most investments. If your investment is not volatile ever, you may be the victim of a Ponzi scheme.

Other hallmarks of Ponzi schemes are when it is difficult to get payments or sell your investment, or when the strategy is opaque or too complex to understand. In those cases, you should simply not invest.

Lastly, investors in potential Ponzi scheme’s should be leery of sellers who are not licensed by FINRA or the SEC.

Unfortunately for defrauded investors, Ponzi scheme cases are often the most difficult cases for an investor to recover their losses. In some cases, third parties such as brokerage firms, clearing firms, and banks can successfully be held liable for the Ponzi schemer’s wrongful conduct. These parties may be held responsible as a party either responsible for supervising the Ponzi schemer’s conduct or for their participation and material assistance in the perpetration of the Ponzi scheme.

However, without a viable defendant to pursue it is often extremely difficult to collect on a favorable award. Many clients are shocked to learn on initial interviews that brokerage firms and advisors are not required to carry insurance to protect against claims of misconduct.

Avoiding Ponzi schemes is very difficult and once you have been a victim of a Ponzi scheme, you will need legal counsel. Many victims of Ponzi schemes either fail to seek out legal counsel because they are either embarrassed of having being taken advantage of or believe that securities regulators are working to return investors’ money. However, a study of 75 cases handled by the Securities and Exchange Commission (SEC) involving the recovery of $4.8 billion in fines from 2002 through 2005 revealed that only about 1% of the proceeds were returned to investors. Therefore, counting on regulators to help you recover your losses is often not a realistic strategy.

Only a securities attorney can help your to evaluate possible avenues to recover Ponzi scheme related losses. Our consultations are free and we are only compensated if we are able to successfully recover on your behalf.