A “Ponzi scheme” is named after Charles Ponzi who was responsible for perpetrating an infamous fraud scheme in the 1920’s. He bilked New England investors by promising a 40% return in 90 days. In today’s investment news, investors have become familiar with this fact pattern from similar modern day scams, such as the Bernie Madoff case. Ponzi schemes are unsustainable and 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 investor demands for withdrawals deplete the remaining funds.
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.
Common characteristics or tactics employed by the perpetrators of Ponzi schemes include:
- 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 ethnic background.
Types of investments Involved 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 Ponzi schemes:
- Consult With a Securities Lawyer;
- 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
- Nationally Recognized Auditor For Investment.
Klayman & Toskes, PA is dedicated to the protection of investor rights. Our law firm represents victims of Ponzi schemes on a contingency fee basis. Our law firm has the experience and knowledge to help determine who may be a responsible party when the perpetrators do not have the assets necessary to recover damages.