The Ponzi scheme is a notorious type of securities fraud, and for good reason. Because it functions by paying off newer investors with money from previous investors while little to no actual investing is going on, everything looks to be on the up and up. Although eventually every Ponzi scheme will run out of new investors to dupe, many of these scams can run for a long time.
So what is a wise investor supposed to do? If a Ponzi scheme is so undetectable that newer investors are being paid and previous investors are able to say they've received the "promised" returns, how can an average investor sniff out a fishy deal? As securities fraud attorneys, we'd like to say that, luckily, with a little education, any investor can be wise to the biggest red flags.
Before you are able to recognize the warning signs of a Ponzi scheme, it is important that you understand what this type of fraud entails. Charles Ponzi was one of the most notorious people who participated in this type of scam, which is why it was named after him. Basically, he collected money from people who wanted to invest in his business and then paid investors large interest payments from the money he obtained from the new investors. While Ponzi didn’t create this form of investment fraud, his operation was the first to become known in the United States.
Ponzi schemes can be difficult to identify. One of the most recent examples involved a man from Santa Ana, CA, who allegedly used money received from new investors to make payments for principal and interest to previous investors. The earlier investors believed that they were receiving returns on their investments. This scam reportedly cost investors $14.5 million. Unfortunately, this case is not isolated, as there are regularly reports of Ponzi schemes resulting in financial loss.
When you are looking into a new investment opportunity, it's important to take the time to check out both the person offering the investment and the investment itself. Verifying that both the promoter and the opportunity are legitimate can save you a lot of time, money, and heartache.
Any person offering an investment should:
Beyond checking out the person offering the investment, you should also look into the actual opportunity itself. If an opportunity features the following, it could be a Ponzi scheme:
Mutual Benefits Company Scandal (2003): Joel Steinger and his company, Mutual Benefits Corporation, carried out a Ponzi scheme by attracting investors with promises of high returns for life insurance polices from terminally ill patients. Steinger bribed doctors to provide false information regarding the patients' expected lifespan; investors filed complaints after 90% of patients lived much longer than expected.
Petters Group Worldwide Scandal (2003): Tom Petters and his company, Petters Group Worldwide, accomplished their nearly $4 billion dollar fraud scheme by creating a complex web of false invoices, fake purchase orders, and a network of co-conspirators to deceive investors into believing they were investing in legitimate businesses.
Madoff Investment Scandal (1991-2008): Bernie Madoff carried out his $65 billion Ponzi scheme (the largest Ponzi scheme in history) by using the funds from new investors to pay returns to earlier investors, while also using a significant portion of the funds for his personal use and to cover up the fraud. He also falsified account statements and other records to make it appear as though the investments were performing well.
Stanford Financial Group Scandal (2012): Allen Stanford and his company, Stanford Financial Group, ran a $7 billion Ponzi scheme by selling certificates of deposit with absurdly high returns, promising investors that their funds were secure and insured. In reality, the majority of the funds were used to finance Stanford's lavish lifestyle, pay returns to earlier investors, and to pay for the company's operating expenses.
The first step you should take if you suspect a Ponzi scheme is to contact an experienced investment fraud attorney. Failure to do so may result in evidence becoming too obscured to properly establish your case. An attorney will take the time to go through your options and determine the best course of action. Choosing the right legal representative is not easy. However, it is absolutely critical in establishing an effective legal strategy.
The right law firm should possess the following qualities:
If you believe that you may have been the victim of a real estate Ponzi scheme then it is important to contact an experienced investment fraud attorney. Meyer Wilson has successfully represented more than 800 investors in stockbroker mediation, arbitration, and litigation claims.
After contacting our firm, we can help you report a Ponzi scheme to the SEC as part of the SEC Whistleblower Program, which provides incentives and protections for individuals who provide credible tips about federal securities law violations, such as Ponzi schemes.