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Ponzi Scheme

A “Ponzi scheme”, named after Charles Ponzi, the notorious fraudster from the 1920’s, who reportedly bilked New England investors by promising a 40% return in 90 days. This fact pattern is similar to many modern day scams heralded in today’s newspaper, such as the Madoff case. The Ponzi scheme is unsustainable and is usually discovered when new victim investments cannot keep pace with the returns paid to previously victimized investors. Periods of declining markets will often uncover the wrongdoing when investors demands for withdrawals deplete the remaining funds.

Many Ponzi schemes are able to grow because the wrongdoer is associated with or otherwise connected to a reputable brokerage firm, insurance company, accounting firm, or law firm which either fails to properly supervise its agent, fails to question red flags, or fails to comply with its own internal or professional guidelines on how it must monitor its agents.

In many instances, Ponzi schemes target those investors who are least able to withstand the losses. The victims tend to be unsophisticated investors who are many times referred by family members, close friends, or members of a group with strong affiliation.

 

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Common characteristics or tactics employed by the Ponzi scheme fraudster:

  • Unexpected Cold Calls, Letters or Emails;
  • Promise of Short Term Guaranteed Results;
  • Uncommon Business Model or Strategy;
  • Limited Availability for Investors; and
  • Investors Concentrated by Group or Association.

Ponzi schemes are also frequently affinity frauds where the wrongdoer is able to convince a large group of connected investors to invest in a fraudulent investment program because they all belong to the same religious organization or the same ethnic background.

Types of investment opportunities offered in Ponzi schemes:

  • Above-Market Interest Rate Returns;
  • Bogus Managed Accounts;
  • Business Franchises;
  • Unregistered Securities;
  • Promissory Notes; and
  • Limited Partnerships.

How to protect yourself from falling prey to Ponzi schemes:

  • Ask What Licenses Advisor Holds;
  • Check Advisors Background with Regulators;
  • Beware of Unrealistic Guarantees or Promises;
  • Limit Amount Invested in Any Single Investment (Diversify);
  • Verify Details of Investment with Custodian of Funds; and
  • Investment Audited by Nationally Recognized Firm.

Con artists are only limited by their imagination, and different schemes continue to be uncovered on a regular basis. Silver Law Group frequently represents victims on a contingency fee basis. We have the experience and knowledge to pursue all responsible parties.

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