We've been hearing a lot about Ponzi schemes in the last few years. Although most people understand that Ponzi schemes are a type of investment fraud, not many really understand exactly how these scams work. It is precisely because so few people understand the inner workings of a Ponzi scheme that so many investors are bilked out of their cash. Understanding how a Ponzi scheme works will help you recognize the scheme at work and avoid being taken in.
Learn more about the aftermath of a Ponzi scheme by reading David Meyer's post for the American Bar Association.
The Ponzi scheme is named after Charles Ponzi, who pulled off his namesake pyramid scam in the 1920's. He promised investors a 40 pence return on mail coupons over 3 months, compared with the 5 pence that could be earned in a savings account. Unfortunately, Mr. Ponzi only actually purchased about $30 worth of mail coupons—although he took in over a million dollars from investors. The structure of the scam was not a new one, but Mr. Ponzi's scheme was on such a large scale and took in so much cash that it has since been named after him.
A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by later investors rather than from actual earned revenue. These types of schemes are illegal and continue to operate on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off the previous investors in a continuous and destructive cycle until the whole scheme eventually falls apart when not enough new investors can be found.
The investment opportunity may have been a genuine opportunity that did not work out as the promoter had planned or the entire operation may have been a fraud from the start. This uncertainty, coupled with the fact that many initial investors are paid "returns" at the beginning, makes it difficult for investors to realize the scheme for what it is until it is too late.
The steps seem simple enough:
It's scary how simple it is...and how often it works. Ultimately, though, it is doomed to fail when it can no longer support the ruse, and there are big consequences for the fraudster and the victims. Although some Ponzi schemes do stretch over 10 years or more, they always collapse eventually because the number of new investors needed to support it becomes a mathematical impossibility. By the time the investors find out, however, the fraudster is usually long gone.
We have seen just about every trick in the investment scam book. Learning to recognize the way fraudsters operate can be a big step toward avoiding Ponzi schemes and other scams.
Take a look at some of the claims you might hear when you're being sold a "lemon":
The first step in getting your money back is partnering with an experienced attorney who is willing to fight for you. You will know that the time is right to call an investment fraud lawyer when:
Investment scam attorneys practice a narrow and specialized field of law. Not every lawyer has the experience necessary to help you recover damages in a real estate investment fraud case.
In deciding which law firm to hire, and to help you recover the money that has been wrongfully taken from you, it is important to consider the following:
For Ponzi scheme victims, an experienced investment fraud lawyer is able to:
As the catastrophic losses suffered by the varied investors defrauded in the recent Bernie Madoff Ponzi scheme illustrate, victims can include anyone—including the following:
Best Lawyers has honored David P. Meyer and Matthew R. Wilson as “Lawyer of the Year” in their respective practices, an elite recognition based exclusively on peer review. The annual award is given to only one lawyer per practice area in each region.
When you hire Meyer Wilson, you can rest assured that we:
Regardless of whether the promoter meant to defraud from the beginning, unsuspecting investors who invest in Ponzi schemes often suffer massive financial losses when the scheme collapses. When this happens, Meyer Wilson can step in and hold the financial institutions supporting the fraudsters accountable. When choosing a securities attorney, results matter. Our firm recovered more than $350 million. View other case results.
For assistance with your securities fraud claim, call us for a free case evaluation.