You would think that it would be easy to spot a Ponzi scheme when there are so many victims, but the truth is a lot more complicated
Ponzi schemes are fraudulent investment schemes that involve paying fake investment returns with funds contributed by new investors. Organizers of Ponzi schemes often promise investors incredibly high returns with little to no risk, paying them from funds invested by new victims.
One of the most famous Ponzi schemes in history was run by Bernie Madoff, who made $50 billion during a decades-long scheme. Investigators have found evidence that it began in the 1970s, yet charges weren’t brought against Madoff until his arrest in 2008.
Unfortunately, not all investment fraud looks the same. And Ponzi schemes can be difficult to spot and even more difficult to prove. Just ask financial analyst Harry Markopolos and his team, who tried to tell the SEC that Madoff’s numbers didn’t add up in 1999. He was also shut down in 2000, 2001, 2005, and 2007—almost a full decade before Madoff’s arrest. Which all begs the question: what keeps a Ponzi scheme running?
High Returns-Guaranteed
Ponzi schemes are often successful at attracting new investors by promising extremely high and extremely consistent returns- far above the market average. The infamous Charles Ponzi, for whom this scheme is now named, offered a 50% guaranteed return on client’s investments within 45 days, and a 100% guaranteed return within 90 days.
Numbers like this are a great example of results that a Ponzi scheme might promise clients. It’s important to understand that the market average for the S&P 500 over the last 50 years is about 7% (once taxes and inflation are accounted for), and that even the best investors in the world usually don’t manage to get more than 20-25% returns year after year, and even this is highly exceptional.
Overly Consistent Returns
The consistency of returns is another factor which helps Ponzi schemes continue luring new investors. Consistency is extremely attractive to investors; if they know exactly how much money they’re going to make in an investment, they can reliably expect the investment as part of their income. Yet the reality Is that worldwide markets are extremely volatile, so any company, fund, or investment that is increasing by the same percentage month after month or quarter after quarter is most likely fraudulent.
Difficulty Receiving Payments
Ponzi schemes often have to stagger their payouts to investors in order to make sure they have enough money in their accounts. Often, it’s as simple as delaying certain payments for a few weeks or months. If the scheme’s organizers can wait until they’ve attracted new investors to pay the current ones, they can keep the fund running and avoid financial collapse. If you have difficulty cashing out your investment, or you’re unexpectedly asked to wait for a certain period to withdraw your funds, it could be a sign of investment fraud.
Flashy Cars, Homes, and Offices: But What Are They Investing In?
Often, the organizers of a Ponzi scheme will overcompensate for their lack of business acumen and try to lure new investors into the scheme by showing off fancy cars, homes, offices, or clothing. Often, when investors ask questions about the actual businesses or companies that the organizers of the scheme have invested in, they will try to distract them with displays of excessive wealth.
Of course, many successful investors buy nice things, but it’s important to ask yourself a few questions, including: “Why are they showing me this right now? Is it to distract me from learning more about the details of this investment?” and “How did they afford to buy this? Does it make sense that their investment could make that much money?
Ponzi schemes are fed by the hopes and dreams of uneducated investors
Undereducated investors who have been promised massive wealth, manipulative organizers with a deep understanding of human psychology, and high pressure sales tactics all contribute to the “success” of a Ponzi scheme. When investors are seeing returns, they usually don’t see a cause for alarm. It’s only when the schemer runs out of new victims that investors realize they’ve been victimized at all. If you don’t know how a business or fund is making its money, it might not be making any at all.
If you think you’ve been defrauded by a broker or financial advisor, or that you’re a victim of a Ponzi scheme, contact Silver Law Group today for a free case review.