You would think after Bernie Madoff, no one would ever fall for it again, but that is just not the case. There have been stories on at least a half-dozen different Ponzi schemes in the news in recent weeks. In a Ponzi Scheme investment fraud, the perpetrator of the fraud guarantees investors high returns on their investment with remarkably low risk.
Unfortunately, in a Ponzi scheme, the investment money collected is never invested. Instead, some of the funds are used to pay enough returns to initial investors so that they do not become suspicious. The rest of the money collected from investors in a Ponzi scheme is used to fund the scheme operator’s lavish lifestyle.
Origins of the Ponzi Scheme
The Ponzi scheme is almost 100 years old, and derives its name from Charles Ponzi, who took advantage of fluctuating postage rates. He had acquaintances in other countries send him a type of postage known as international reply coupons. This allowed individuals writing to friends or loved ones in another country to include the coupons, which could be used for their replying correspondence. Ponzi would trade in the international reply coupons for stamps that were more expensive than the original cost of the coupons. He then sold the stamps for profit by undercutting the postal service’s price. Sound enterprising? Sure. Illegal? Not yet.
Greed got the best of Ponzi. He wanted larger profits and began a company, Securities Exchange Company, which would sell investment shares guaranteeing steep returns within a short period of time. However, Ponzi didn’t invest any of the investor’s money. Instead, he took the money from new investors to pay the promised returns to the older investors. Ponzi, of course, took a commission from the phantom returns. An investigation into the Securities Exchange Company one year later uncovered Ponzi’s scheme.
It Might be a Ponzi Scheme if…
If you’re faced with an investment opportunity that seems too good to be true, it probably is. Consider the following if you suspect an investment opportunity could be a Ponzi Scheme:
- Market downturns aren’t affecting the investment vehicle’s outstanding returns. Returns are consistently good, even if market conditions are negatively affecting other types of investments.
- You’re having trouble getting investment dollars returned. If you’re asking for your money back, the investment company will have a hard time returning it in a timely fashion. Why? Because they’ve already used your money to pay returns for other investors.
- The investment company isn’t registered with the Securities Exchange
Commission (SEC). As well, sellers of the investment aren’t registered or licensed.
- Returns are promised. No licensed investment company or seller can guarantee a positive rate of return.
- Investment strategies are a secret, and are often referred to as too complex to be outlined in company collateral or brochures.
If you feel you may be the victim of a Ponzi scheme, or if you have questions about the ethics of an investment firm or the legality of their product, contact the experienced securities fraud attorneys at Bennett Weston LaJone & Turner, P.C. have extensive experience representing both brokerage firms and individual investors and are prepared to represent you in any securities fraud matter.