Ponzi Schemes – What You Need to Know
Ponzi schemes are fraudulent investments that involve paying off investors with new investors. Schemers will gain new investors by promising opportunities for investments funds that will supposedly generate high return rates. They often claim these high return investments will come at little to no risk. One of the most recent of these schemes was masterminded by none other than Bernard Madoff. While investigations into the Madoff scheme are still being undertaken, facts show that Madoff spent decades scheming celebrities, nonprofit organizations, funds, and banks in what would come to be known as the biggest Ponzi scheme in history. His devious actions would scheme these people and institutions out of $50 billion, earning him a 150-year federal prison sentence.
The term “Ponzi scheme” was named for Charles Ponzi, a businessman and swindler in the early twentieth century. He asked thousands businessmen around New England to invest in his Securities Exchange Company, promising as much as a 50% return in any investments in three months. He even went as far to buying international mail coupons in order to make his scheme appear legitimate. In only six months, Ponzi was a millionaire—the epitome of the get rich quick scheme.
Determining whether or not an investment opportunity is one of these scams can be difficult, but not impossible. All Ponzi schemes share similar characteristics for which investors should be on the lookout. The major red flag is the promise of high investment returns with little to no risk involved. No matter what, investments carry risks. Those that have higher yield returns often come at greater risks than more conservative investments, so be suspicious of any investment that guarantees anything. Also be wary of overly consistent returns, since legitimate investments will go up and down over any given length of time.
Investments should always be registered with the US Securities and Exchange Commission (SEC). Scams are typically not registered because investors will be given access to the company’s information, services, finances, and other information. All investment professionals should be licensed, so be on the lookout for unlicensed sellers or unregistered investment firms. Avoid anyone with secretive strategies and always be on the lookout for account errors. If you have trouble receiving a payment or cannot cash out an investment, it could be a scheme. Ask yourself if the investment is registers, if the seller is licensed, and how the risks compare to the potential earnings.