How to Protect Yourself From Ponzi Schemes

May 19, 2017 / Author Chris Vernon
Ponzi Schemes

A Ponzi scheme is an investment scam meant to attract large investments with the promise of even larger returns, but the one running the scheme essentially takes the money and runs. It is very important for prospective investors to recognize the signs of a Ponzi scam before agreeing to invest because once invested, the money can be difficult to recover.

The Inventor of the Ponzi Scheme

The term “Ponzi scam” was first coined after Charles Ponzi rose to notoriety in the 1920s. Ponzi promised potential investors a staggering 50% return on their initial investment after only 45 days and a 100% return after 90 days. His investment scheme focused on international postal coupons that were never actually bought. Ponzi earned $15 million in investments within six months.

Unfortunately for Ponzi, the authorities caught on to this scam within a year and charged him with 86 counts of mail fraud. He served five years in federal prison and was then convicted a second time in Massachusetts. Ponzi argued that the second prosecution violated the Double Jeopardy clause of the US Constitution, but the Supreme Court affirmed the conviction and Ponzi received another prison sentence of seven to nine years. Not one to learn from past mistakes, Ponzi started another scam as soon as he left prison. This new real estate scheme was run under the business name “Charpon Land Syndicate”. Unfortunately for investors, most of the land in which they invested happened to be underwater.

After evading a prison sentence for his real estate scam, Ponzi’s life was essentially a series of new cons, along with the inevitable investigations, and legal entanglements. He was ultimately deported as an undesirable alien (having never obtained U.S. citizenship) and died in poverty and ignominy in a Brazilian charity hospital in 1949.

Other Notable Investment Scammers

Despite the cautionary tale formed by the life of Charles Ponzi, several other individuals have reached infamy in American history through dishonest investment schemes. Some of the most notorious Ponzi scammers in U.S. history include:

  • Lou Pearlman. A music producer in the 1990s, Pearlman was well-known and successful in the entertainment industry, but he had an illegal side business that entailed stealing more than $300 million over 20 years. Pearlman convinced investors to pour money into two companies he owned that only existed on paper. He was convicted in 2008 and sentenced to 25 years in prison.
  • Gerald Payne. Pastor Gerald Payne managed to swindle $20 million from 18,000 members of his congregation. He and his wife Betty managed to avoid detection for some time by only cashing checks under the $10,000 limit for reporting to the IRS. Once their scheme was uncovered by the authorities, Gerald received a 27-year prison sentence. His wife was sentenced to nearly 13 years.
  • Bernie Madoff. Considered second only to Ponzi himself in notoriety, Bernie Madoff committed more than 11 federal felonies through his operation of the biggest fraud in American history. Madoff managed to steal a staggering $65 billion through his wealth management company based in New York. The business started on legitimate terms but eventually became a variation on the original Ponzi scam. Madoff received the maximum sentence of 150 years in prison.

Learn From History

Risks are sometimes difficult to evaluate accurately when investing, and any new investor must carefully weigh his or her options before pouring capital into a promising investment. The Securities and Exchange Commission (SEC) takes investment fraud seriously, and it has identified some red flags investors should look for before making any financial decisions:

  • Little to no risk. If any investment opportunity guarantees returns or promises specific amounts, be cautious. Thoroughly investigate the prospect before committing. If it sounds too easy or too good to be true, it probably is.
  • Suspiciously consistent returns. Investment values naturally fluctuate. Most Ponzi schemes stay in motion by paying off early investors with the investments made by latecomers. If you notice steady, positive returns on an investment, it should raise a red flag. An investment that returns consistent amounts regardless of overall market conditions should be regarded with suspicion.
  • Unlicensed sellers. The SEC (along with state and federal securities laws) requires that investment firms and investment professionals obtain licenses. Ponzi scheme operators rarely obtain such licenses. Verify that the organization offering your investment opportunity can provide proof of its legitimacy.
  • Unregistered investments. Registration with the SEC provides investors with information about investment companies’ products, services, history, finances, and management structure. Ponzi scheme investments are usually unregistered with the SEC and other regulatory bodies.
  • Paperwork issues. Any legitimate investment company will provide you with hard copies of pertinent information for your review upon request. Treat any issues or excuses about paperwork with scrutiny and caution. Errors with your account statements and any other clerical inconsistencies should be considered warnings as well.
  • Overly complex or secretive strategies. If you don’t understand how a potential investment will work, it’s more than likely a good idea to avoid it. A legitimate investment strategy should be relatively transparent and easy to digest when explained to you.
  • Difficulties receiving return payments. If you encounter any issues cashing out your investment or obtaining return payments, tread carefully. Ponzi scheme operators usually try to encourage investors to continually “roll over” investment returns with the promise of even greater future returns. Legitimate investment organizations will have clear procedures for obtaining returns and cashing out, should you wish to do so.

Other Tips for Avoiding Ponzi Schemes

Many potential scammers have troubling Financial Industry Regulatory Authority (FINRA) disclosures. Every investor should check out their broker before beginning a relationship. Brokers, investment advisors, and firms that sell stocks, bonds, mutual funds and other securities generally must be members of FINRA. As long as the broker is registered, investors may obtain a free FINRA report containing his or her record, which includes disclosures of any claims against them and how they were resolved, as well as their licenses, work history and other details.

Always investigate potential investment companies or professionals as fully as possible before committing to any moneymaking opportunity. Remain vigilant, evaluating your broker constantly with these red flags in mind. Do not accept excuses for inconsistencies. If your questions are not being answered, do not be afraid to request more information or contact ponzi scheme attorneys. An honest and up front broker will have nothing to hide.

ABOUT VERNON LITIGATION

Vernon Litigation Group is based in Naples, Florida, with additional offices in Orlando, Florida, and Atlanta, Georgia. Vernon Litigation Group currently represents victims of securities fraud and whistleblowers in court, arbitration, mediation, and regulatory filings throughout the United States. Please contact us to discuss your rights if you believe an investment professional or investment firm has failed to act in your best interests or otherwise abused your trust. For more information on our ponzi scheme attorneys in Naples, visit our website at http://www.vernonlitigation.com/ or contact Vernon Litigation Group by phone at 1-877-649-5394 or by e-mail at info@vernonlitigation.com to speak with Vernon Litigation Group.

Sources:

http://www.therichest.com/rich-list/nation/10-of-the-biggest-ponzi-schemes-in-history/
https://www.sec.gov/answers/ponzi.htm
https://www.investor.gov/investing-basics/avoiding-fraud/types-fraud/ponzi-scheme
https://www.linkedin.com/pulse/effect-cognitive-biases-decision-making-crisis-dimitris-agrafiotis?articleId=6078941913543696384

Mr. Vernon handles the litigation and arbitration of complex business and financial disputes, with an emphasis on securities fraud and securities arbitration, throughout the United States.