Ponzi Schemes

Put simply, a Ponzi scheme is a type of fraud involving the payment of supposed investment returns to earlier investors from funds received from newer investors. Such a scheme maintains an illusion of legitimacy so long as funds from newer investors are sufficient to pay earlier investors.

Ponzi schemes get their name from Charles Ponzi, a charismatic salesman in the early 20th century. He convinced people to “invest” in international mail coupons at a discount, to subsequently be resold for a 50 percent profit. But Ponzi only committed some investor monies to mail-coupon purchases. Instead, most funds were used to prop-up the scheme by paying earlier investors with monies raised from newer investors. By July 1920, Ponzi’s fraudulent scheme unraveled when he was unable to raise enough new capital.

Likewise, with little or no legitimate earnings on investment capital, modern-day Ponzi schemes require an ever-increasing and consistent flow of money to perpetuate the fraud. Many Ponzi schemes share similar warnings, or red flags. Investors should look out for these red flags:

  •  High returns with little or no risk. Every investment carries some degree of risk, so investors should proceed cautiously if solicited to invest in a “guaranteed” opportunity.

  •  Overly consistent returns. Investment values fluctuate over time, especially investments that offer higher returns (the risk/reward ratio). Investors should scrutinize investments that display exceedingly smooth, consistent returns over a prolonged period.

  •  Unregistered investments. Ponzi schemes often involve securities that have not been registered with the SEC or with state regulators. The registration process involves comprehensive disclosures, so investors in registered securities have ample opportunity to access key information about a company’s products and services, management, and financial condition.

  •  Unlicensed sellers. Federal and state securities laws require that an investment professional be licensed or registered. Investors in complex investments should check the background and professional status of the person recommending an investment.

  •  Complex strategies. Generally, investors should avoid investments or investment programs that are too complex to readily be understood on a basic level.

  •  Suspicious documentation. An investor who receives suspicious documentation with errors or inconsistencies concerning an investment should proceed with caution. A legitimate investment will normally have professional-looking supporting documentation, free from significant or obvious errors or inconsistencies.

  •  Failing to receive a scheduled payment. Investors should be mindful of any missed payments. Furthermore, they should be aware of being asked to “roll over” investments with the promise of a higher return on the amount rolled over.

Investors victimized in a Ponzi scheme may have recourse to recover funds. In some instances, a financial advisor or stockbroker might recommend an unregistered security. In such a scenario, the financial advisor has engaged in what is known as “selling away” which is a violation of applicable securities laws and FINRA regulations. In addition to the rules and regulations governing broker-dealers and financial advisors, states have their own securities laws, known as “Blue Sky Laws.” Based on a particular state’s blue sky provisions, various persons and/or entities involved in a Ponzi scheme may be found liable for their involvement in the enterprise, including assisting in the sale of unregistered securities or aiding and abetting the scheme.

The attorneys at Giarrusso Law Group LLC possess considerable experience in successfully representing, in a variety of forums, investors who have incurred losses due to financial fraud, including Ponzi schemes. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.