What is a Ponzi Scheme?
A Ponzi scheme operates by promising high rates of return on investments, but in reality, the scam uses money from newer investors to pay off earlier ones. Eventually, the scheme collapses when investors ask to cash out and funds are not available or new investors do not enter the scheme to supplant the earlier investors’ returns. The name of this investment fraud technique is tied to scam investments made in the 1920’s, but they still occur to this day. The most recent famous Ponzi scheme occurred under former stockbroker Bernie Madoff’s watch, and the operation lasted three decades and cost investors billions of dollars before collapsing during the Great Recession of 2008.
How to Recognize a Ponzi Scheme
Step 1: You are promised a high rate of return. Investors are promised a high return rate, but not so high as to be unbelievable. This may also be paired with promises of consistent returns on investment.
Step 2: The operators claim to have insider information regarding the investment. The person or people running the Ponzi scheme may purport to have explanations about how the high returns are achieved, citing various statistics and resources the public does does not have access to. This claim may help the operators appear legitimate to the investors.
Step 3: There are short-term payoffs for initial investors. The operators often build legitimacy with earlier investors by paying them off quickly, encouraging those who have been scammed to see this as a worthy investment. In truth, the money newer investors put into the Ponzi scheme is being used to pay back the initial investors, leading all of those involved to become victims of the operators’ scheme.
Ponzi Scheme FAQs
Who do Ponzi schemes typically target?
The problem with Ponzi schemes is that anyone can become a victim, so there is no common thread among those taken advantage of by this scam. Ponzi scheme victims range in age, socioeconomic status, and amount of money invested into the venture. Those who defraud victims of their money are often quite cunning, and the victims themselves entrust them with their money without knowing all the facts.
What’s the difference between a Ponzi scheme and a pyramid scheme?
While Ponzi schemes and pyramid schemes are often used interchangeably, they do have some differences. In pyramid schemes, there is typically a requirement to recruit others to join in, and once you do, there are promises to increase your rate of return. Ponzi schemes do not require more work than investing your money.
I received some payments from an investment that later turned out to be a Ponzi scheme. What happens to me now?
It is imperative you contact an experienced broker fraud attorney to determine the best course of action. Our attorneys might ask you about the amount you invested and when, as well as how much you received from your investment and if the return was more than the amount of money you put into the scheme. This can help us define a strategy for your case.
How do I get money back after a Ponzi scheme?
Ponzi scheme victims may choose to sue their broker, file a claim with a receiver, or sue whoever sold them the securities as part of the operation. No matter what you choose, it’s important to work with an attorney who has experience in FINRA arbitration, such as those at Oakes & Fosher. Contact an Investment Fraud Attorney. If you are worried you have been involved in a Ponzi scheme and the operators have taken advantage of you or a loved one, it’s important to be diligent and seek representation as soon as possible. The attorneys at Oakes & Fosher are experienced with securities fraud and can help. Contact us today to discuss your case.