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Ponzi Schemes

In the early 1920s, a man arrived in New England from Italy. Charming and persuasive, he brought with him an irresistible business proposition he offered to residents: He promised them that they could earn a 50 percent profit within a very short period of time by investing in postage stamp speculation. That man’s name was Charles Ponzi.

By now, most people have a basic idea of how a Ponzi scheme works. In the original version, Ponzi used investment money from new investors to pay the older investors. Amazingly, he was able to run this fraud for more than year. When it finally collapsed, the people he duped lost about $20 million. Ponzi wasn’t the first to attempt to steal from people in this manner, but it has since becoming inherently linked to him.

The evolution of the Ponzi scheme

Ponzi schemes haven’t actually changed all that much in the last century. No one is investing in stamps anymore, but fraudsters never seem to have an issue getting people to think that they can be rich in no time. When investments continually rely on new people bringing money in, that’s a problem. Eventually when more investors can’t be found or investors want to cash out, the scheme will be revealed. As savvy as people have become, Ponzi schemes are still very common.

Are Ponzi schemes the same as pyramid schemes?

Often the terms Ponzi and pyramid schemes are used interchangeably. Since they both are contingent on getting new people to buy in, they are similar. However, a Ponzi scheme has to do with an investment while a pyramid scheme is usually product-oriented. For example, if somebody is offered a great deal that involves selling a product, but most of their income will depend on how many other people they can sign up to do the same thing, that’s a pyramid scheme.

How do you know an investment is a Ponzi scheme?

Crooks have gotten better at hiding their ruses, so investors have to be smart about where they put their money. Here are some red flags to look out for:

  • Too good to be true: You should be skeptical of anything advertised as high reward with little or no risk, or if any guarantees are made.
  • Regular, positive returns: The market fluctuates, so if an investment is consistently generating regular, positive returns, this is another warning sign.
  • A confusing strategy: It’s always a good idea to walk away from an investment or an investment strategy you don’t understand.
  • No paperwork: There’s never a good reason why you can’t access documents related to your investment.
  • Unregistered investments or sellers: If you have any doubt about an investment, check to see if it has been registered by the SEC. You can also check on the registration of a broker.
  • Lack of payment: If you have trouble getting payment and/or the seller is pushing you to roll over your investments, this is another bad sign.

Don’t let the criminals get away with it

As Bernie Madoff proved, even smart and successful people can be duped into fraudulent investments, so it’s nothing to be ashamed of. If you were taken advantage of in this way, you may be able to recover lost money. To learn about your options, contact Silver Law Group today.

Many Ponzi schemes are sold by financial advisors, brokers, and others who fail to conduct reasonable due diligence before recommending the investment to retail investors. All too often, investment advisors turn a blind eye to red flags because the advisor is earning a large commission, markup, or bonus for introducing the investor to the Ponzi scheme. In other cases, either the investment product or the salesperson is not registered with the SEC or the Financial Industry Regulatory Authority (FINRA) – and the investor may be entitled to return of their money because of the lack of registration.

If you believe you are the victim of a Ponzi scheme or your financial advisor has violated the provisions of federal securities laws, we will fight to recover your money. We are a contingency-based firm, so you won’t owe us a fee unless we are successful.

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