Ponzi Scams

Ponzi schemes are scams that use funds collected from new investors to pay existing investors. No real investment exists and eventually these schemes collapse. Scammers contact people on social media and asking them to download or invest through apps. They promise you will see high returns very quickly and you will think you do, but the scammer uses money other people have invested to pay you some return. Once you have seen a return, the scammer will persuade you to encourage your friends, family and colleagues to invest in the same scheme. They will pay them ‘returns’ and ask them to recruit people they know into the scheme as well. Eventually, when the scammer runs out of money or the pool of people being recruited dries up, the scammer will disappear and no one will be able to recover their money.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
Ponzi scheme “red flags”

Many Ponzi schemes share common characteristics. Look for these warning signs:

1. High returns with little or no risk.

Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

Overly consistent returns.

Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.

Unregistered investments.

Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.

Unlicensed sellers.

Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

Secretive, complex strategies.

Avoid investments if you don’t understand them or can’t get complete information about them.

Issues with paperwork.

Account statement errors may be a sign that funds are not being invested as promised.

Difficulty receiving payments.

Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.