An experienced securities fraud attorney explains why Ponzi schemes are destined to collapse and three ways they eventually fail.
A Ponzi scheme can keep up the appearance of legitimacy for a long time, and it’s one of the main reasons Ponzi schemes are so dangerous and cost investors millions of dollars. However, all Ponzi schemes are unstable and doomed to fail eventually. Here are some of the main reasons why Ponzi schemes collapse:
- The Ponzi scheme is discovered. All Ponzi schemes are illegal, and there is always a risk they will be found out long before the scheme collapses on its own.
- Lots of investors decide to pull out their cash. If a few investors start experiencing losses or sniffing out the scam, then it doesn’t usually take long for lots of investors start asking to cash out. With investors leaving left and right, a Ponzi scheme can collapse virtually overnight.
- The Ponzi scheme can’t attract enough new investors. A Ponzi scheme depends on cash from new investors to pay off prior investors, but it starts to fall apart when there are more prior investors to be paid than new investors coming in.
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