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Are you about to fall sufferer to a Ponzi scheme?

January
2, 2021

8 min read

The opinions expressed by the entrepreneur's contributors are their own.

A century ago, in October 1920, Charles Ponzi was charged with postal fraud by a federal grand jury. The prosecution put an end to a massive fraud Ponzi committed on countless victims, one so notorious that similar fraud cases have borne his name ever since: Ponzi Schemes. This anniversary should be a timely reminder for investors planning their retirement to review their financial statements and retirement goals, and to take a critical inventory of the due diligence they undertake when evaluating a new investment opportunity.

The most important thing about investing in pension funds is that you don't get a second chance. If an investment turns sour in your forties, you have time to recover. Caution is the best strategy when looking at an investment that you want to retire comfortably with.

Because of this, people looking to invest money for their retirement need to be extra careful when getting involved in a Ponzi program.

The practice has been around for hundreds of years – the author Charles Dickens wrote about it in two of his books – but this type of fraud gained national fame among Charles Ponzi in the 1920s, which is why it is now associated with his name.

What is a Ponzi Scheme?

In the simplest case, a Ponzi program offers you a high return on your investment. Once you give them your investment money for a while, you will likely see a nice dividend or interest payment and think that putting your hard-earned retirement money into this company was a great idea. However, the money you get doesn't usually come from smart investments. Most of it comes from later participants who gave their money to that person / company.

Most of the money you thought you invested is being misused. Some of this is being bagged by the people you gave it to, and some has been sent to previous investors to keep them happy and not to ask questions.

A Ponzi program usually looks good in the short term but eventually breaks down as there is nothing or very little that really supports the money spent, like stocks, bonds, or investing in real estate (unless you count the yachts, luxury cars and villas the planner bought with other people's money).

Do all of the Ponzi plans bring together?

Sooner or later, all Ponzi plans eventually collapse. This is due to serious shortcomings inherent in their business model. Over time, it becomes more difficult and ultimately impossible to continue the program.

Three things that usually break the Ponzi scheme

The program is running out of new investors. The program is based on constantly attracting new investors who allow the scammer to repay the old ones. If enough new people aren't interested, the Ponzi planner has no money to give the old investors. Suddenly those big dividend checks aren't that big anymore or they don't come at all. Calls to the office are not returned. Emails are answered with excuses about "technical problems". Don't worry, everything is fine. Finding an attorney could be a smart move if you get suspicious.
Some investors are trying to repay their investments. If you reclaim all of your investment, it will also decrease. It could be completely innocent on your part. You like everything about what they do, but you decide that there is something else that you would rather do with that money. Maybe buy a house, help your kids start a business, or buy a new car. However, when you ask for your account to be closed and the money sent to you, there seems to be a problem. They are constantly being put off or informed that there will be a delay. Often times you won't get a response from anyone in your office. At this point, you should find a good lawyer experienced in this type of scam.
A regulator takes action. The scammers could be reaching out to a potential investor who happens to be a lawyer, law enforcement officer, or regulatory agency. Or a whistleblower who is an insider working with the fraudster, or the fraudster's accountant, bookkeeper, or lawyer realizes what is going on or is concerned about his personal liability and contacts the government. Or maybe the scam will archive or publish documents or information that comes up with a regulator or law enforcement agency and they will start investigating. The youngest famous supplier of a Ponzi program was Bernie Madoff. He has fled many people, including the owner of the New York Mets baseball team (who later had to sell it for financial reasons). Before Madoff was caught by the FBI in 2008, it was reported that he had fraudulently acquired up to $ 65 billion.

Are Ponzi schemes legal?

Absolutely not. It's a capital letter "F" scam.

No matter what, a Ponzi scheme will eventually collapse. It will get too big to attract enough new investors to cover the old ones. The longer it takes, the more people will be injured. By realizing as early as possible that this fabulous high-yielding new investment is truly a fraudulent Ponzi scheme, you can get your money back not only but others too.

People who run Ponzi programs are usually good speakers, throwing lots of words around and maybe even showing you fancy, complicated diagrams. How do you say what it really is?

Related: It's time to talk about startup scammers

How can I tell if an investment is a Ponzi program?

Here are some tell-tale tips someone is trying to take your money in a Ponzi program:

High investment returns with little or no risk. The old adage "if it's too good to be true, it usually is" certainly works in this case. Overly consistent returns. Everyone knows the stock market goes up and down. If you get almost the same return, or if it is promised, this is a red flag. Unregistered investments. Most Ponzi schemers are not registered with the SEC or state agencies. Registration enables private individuals to access information. Asking credentials is an easy way to verify that someone is selling investments. Unlicensed sellers. All sellers of securities must be either federally or state-registered. Ask about your license. Secrecy or complex strategies. If you can't understand the investment strategy they set out, it's them, not you. If you can't figure out how to make money, then they probably aren't. Problems with paperwork. Get everything in writing. If you suspect you should contact an investment attorney. It's not a time for a handshake agreement to give your retirement money to someone you don't know. Difficulty getting payments. If your billing has errors or payment issues, that's a big red flag.

These tips are based in part on admonitions from the Securities & Exchange Commission to investors, the federal agency that regulates the issue and sale of investments to the public.

Related: Determining If a Biz Opp is a Scam

What should I do if I invested in a Ponzi program?

When you find that you have money in a Ponzi scheme, there are steps you can take to get your investment back.

As mentioned earlier, the sooner you find out, usually the better.

You should contact an experienced securities attorney. Keep in mind that you are likely dealing with a highly sophisticated operator who is used to fending off unhappy investors and having lots of tricks to keep them away from their funds.

Another option may be to contact a state or federal regulator or law enforcement agency who can investigate the system and the fraudster and take appropriate action if the evidence warrants it.

Think twice before trying to resolve the problem yourself. Self-help could cause more problems than it solve. For example, any money the scammer could offer you could be money that has just been invested by another victim who does not know that their investment will be used to pay off another investor.

If you suspect misconduct, this may be a time to get your records in order and carefully document – or record, if permitted by law – your conversations with the scammer or his accomplices.

Related: 3 Easy Ways To Get Around Phone Fraud

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