A Ponzi Scheme

  • Amy

A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Think of it like a Ferris wheel where the money you “gain” is really money the next person is “investing” and it goes on like a cycle. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.

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 Scheme “Red Flags”

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

  • Promises of High Returns with Little or No Risk. Guaranteed high investment returns are the hallmark of a Ponzi scheme. Every investment has risk, and the potential for high returns usually comes with high risk. If it sounds too good to be true, it probably is.
  • Unlicensed and Unregistered Sellers. Most Ponzi schemes involve individuals or firms that are not licensed or registered. Even if an investment professional comes across as likeable or trustworthy, use the free search tool on Investor.gov to check whether the person is licensed and registered. 
  • Overly Consistent Returns. Investment values tend to fluctuate over time. Be skeptical of an investment that generates steady positive returns regardless of market conditions.
  • 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

If you or someone you know has been pitched an investment with any of these red flags, report it to the SEC. Also, be wary of aggressive sales ploys such as pressure to buy immediately and persuasion tactics such as offering investment seminars with a free meal. Take your time deciding whether an investment is right for you and don’t give any money until you have confirmed for yourself that the seller is licensed and registered.

For investments that you already have, be suspicious if you have problems getting paid or if you are pressured to rollover your investments. Ponzi scheme promoters sometimes try to prevent investors from cashing out by offering even higher returns for staying invested.

Where Can I Go For Help?

If you have a question or concern about an investment, or you think you have encountered fraud, please contact the SEC, FINRA or your state securities regulator to report the fraud and to get assistance.

U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, D.C. 20549-0213
(800) 732-0330
sec.gov
investor.gov

Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue Rockville, Maryland 20850
(301) 590-6500
www.finra.org/Investors/

North American Securities Administrators Association (NASAA)
750 First Street, NE
Suite 1140
Washington, D.C. 20002
(202) 737-0900
www.nasaa.org