A Ponzi scheme is a form of investment fraud in which a company finances its payout of returns to investors using money paid by new investors. To keep the scheme afloat, these firms work to attract new money by promising investors high returns with little or no risk. One of the most notable recent Ponzi schemes in the news was one operated by Bernie Madoff. However, there have been thousands of Ponzi schemes through the decades both small and large in scale.
The funds that a Ponzi scheme generates are usually spent on enriching the manager of the scheme. By the time a Ponzi scheme collapses or investors have discovered the plan, it can be difficult or impossible for investors to get back their money. If you are concerned that someone duped you into investing in a Ponzi scheme, get in touch with an investment fraud attorney right away.
Signs of a Ponzi Scheme
Because Ponzi schemes are fraudulent by nature, it can be difficult to spot one – this is why so many people get drawn into Ponzi schemes unaware. However, there are some common traits of most Ponzi schemes that should set off red warning flags as you review potential investment opportunities:
- High returns with no risk. If a fund is promising its investors a high return on their investment with little or no risk, be highly suspicious. Legitimate “high yield” investments are generally risky, and the law requires financial advisors to disclose those risks.
- Unusual consistency in returns. The values of legitimate investments fluctuate; they go up and down along with the market. This is particularly true of investments that offer high returns. You should approach any investment opportunity that consistently provides high returns to its investors, even in an unstable market, with extreme caution.
- No registrations or licenses. Most Ponzi investments aren’t registered with state regulators or the SEC. Registration provides investors with crucial information about a company’s inner workings to help them make informed decisions, so be skeptical of unregistered investments. Likewise, both federal and state laws require investment professionals and companies to be licensed, so use caution if an investment opportunity involves an unlicensed firm or individual.
- Secrets and unnecessary complexity. Ponzi scheme managers find they can dupe inexperienced investors by hiding behind “company secrets” and complex or highly technical language. If a firm seems to be holding back information or providing you with documents you can’t understand, avoid investing there.
- Paperwork problems. As an investor, you should always be able to review information about your investments in writing. Be alert for any reluctance on the part of a firm to provide you with paperwork, as well as errors or inconsistencies that can point to mismanagement of funds.
- Trouble with payments. Ponzi schemes rely on continued cash flow from investors to keep running. They’ll often encourage you to roll over your investment, promising an even higher return, rather than paying out as promised. This should be a big red flag.
Who’s Responsible for Damages
Financial Industry Regulatory Authority (FINRA) rules prohibit individual financial advisors from selling securities their firm does not offer. When financial advisors do so anyway, without the firm’s knowledge, it’s illegal – a practice known as “selling away.” If your financial advisor engaged in selling away as part of getting you to invest in a Ponzi scheme, both the individual advisor and his employee brokerage firm can be held legally responsible for your losses.
A financial advisor who sells his client an investment of a Ponzi scheme may have recommended an unsuitable investment, failed to perform adequate due diligence, made misrepresentations or omissions and breached his or her fiduciary duty to you, the client. It can be difficult to determine your broker or brokerage firm is legally responsible for your losses in a Ponzi scheme. An experienced Ponzi scheme attorney can help you determine your legal options for recovering damages. Contact us for a free confidential consultation, and let us review your case to determine whether you have a valid claim.