What are Ponzi Schemes?

By  //  January 28, 2022

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Many people who pursue investment opportunities within their social networks can sometimes fall victim to fraud. One of the most common types of fraud that people experience is the Ponzi Scheme. If you are in need of a Ponzi Scheme fraud defense and legal counsel, keep reading. The first thing to remember is that you are a victim, and it’s important not to blame yourself.

Ponzi Schemes are often identified with Wall Street and criminals such as Bernie Madoff. With today’s common digital financial services, it has become a lot more likely for people to make investments with firms and brokers that they only know through email, text chats, or phone calls. Even with face-to-face interaction, it can be easy to be swept up in the excitement of a “can’t lose” deal or investment. 

If you find yourself a victim of financial fraud, time is of the essence. We know that it can be an embarrassing situation, but we’re here to help. Selecting an experienced and knowledgeable attorney can make the difference between losing a substantial amount of money and receiving restitution for your losses. Don’t delay, have your case evaluated now. 

Ponzi scheme definition

A Ponzi scheme is most easily defined as a fund or another investment that uses the money received by new investors to pay current clients. The fund itself doesn’t pay out the returns, the incoming money from new investors is simply passed along. Many investment companies turn to this illegal practice after their investments have lost money or are not providing expected returns. Rather than report the losses to their clients, they simply cover them up.

Whether you have unwittingly invested in such a scheme, or a previously good fund has gone rogue, the result is often the same: you are out a significant amount of money due to someone else’s malfeasance. News of Ponzi schemes usually travels by word of mouth.

You hear from a friend about a great new investment they heard about from their brother-in-law. These types of conversations can be dangerous because it’s so easy to get caught up in someone else’s excitement. Be sure to always do your own research, no matter how reliable you find the source of the information or tip. 

The term “Ponzi scheme” comes from a financial swindler, Charles Ponzi, who was active in the 1920s. In his case, the scheme involved postage stamps and a lot of speculation. There’s nothing new about these types of fraudulent investments!

Investments and Ponzi schemes

The U.S. Securities and Exchange Commission is a useful resource if you are considering an investment that you fear may be too good to be true. This site can also help you spot the red flags that occur after investing in a fund that may not be legitimate. It is highly recommended that amateur investors avoid unregistered investments and only invest their money in funds presented by registered sellers.

While many Wall Street investors decry the burden of regulations, there are many such statutes in place to protect non-institutional and personal investors. Before you take on any new investment, be sure to do your due diligence. Investigate the company holding the investment as well as the firm or broker who is selling it to you.

There is no reason to skip this step. Even if all of your golf buddies have gone on and on about how much money they’ve made, you need to do your own legwork.

Once the initial frenzy begins to fade and fewer new investors are brought into the scheme, it won’t be long until the entire house of cards collapses. Because the new investments are being used to pay out returns, once new money stops coming into the investment, there’s nothing to pay out.

This is when disreputable companies may close up shop or disappear. They may also contact longstanding investors and try to convince them to invest more money.

There is nothing worse than throwing good money after bad, so don’t be sucked into sending money in spite of your reservations. For active investors that pay attention to their investments, it usually doesn’t take too long for the cracks to begin to show. If you fear that you’re about to lose a substantial amount of money due to fraud, it’s time to engage a lawyer.

In fact, if you become aware of any of the red flags discussed in this article, it’s time to find a qualified attorney. Be sure to work with a firm that has the financial fraud experience necessary to successfully resolve your case.

Are MLMs Ponzi Schemes?

If you have been approached by a friend, family member, or acquaintance about an opportunity where you will be able to earn “limitless income”, you may think it’s too good to be true. After listening to the pitch, you can find yourself being swayed by their way of thinking. And, you may start to ask yourself if this particular MLM is a pyramid or Ponzi Scheme, or if it’s one of the few exceptions. 

While a Ponzi scheme operates on bringing new investors into the fund, a Pyramid scheme relies on members bringing more salespeople to the team. The end result is the same as they are both fraudulent practices that aim to bilk clients or team members out of their hard-earned money.

Just like other traditional investments, it’s important to do your research before getting involved. Every financial commitment that you make should be carefully considered. Even if you feel like it’s a small amount of money at risk, you don’t want to suffer the stress that comes with being defrauded.

Whatever it’s called, if you hear of an investment opportunity that seems like a fast and sure money-maker that’s going to change your life overnight, you should take a much closer look at the potential pitfalls and risks! And, if you have realized too late that you are in a bad situation, seeking legal advice right away can help you recover some if not all of your investment.

How to protect yourself from financial fraud

Prevention is always easier than a cure, so the best way not to fall victim to financial fraud is to avoid getting involved in the first place. Of course, that is easier said than done, and hindsight is 20-20. Below is a list of red flags to watch out for when selecting an investment.

This information comes from the SEC. One of the most important things to remember when considering an investment is that if it sounds too good to be true, it probably is!

 Unregistered investments – when an investment is unregistered it means that it is not registered with the SEC or any other state or local regulating bodies. While there are some legitimate unregistered investments, this should be a huge red flag to personal and non-institutional investors. 

■ Oddly consistent returns – if you hear about a fund that makes a consistent return month after month without any losses, you should definitely dig deeper into the situation. It is totally normal and expected for an investment to have periods of great gains, losses, and times when there isn’t much movement at all. If you are presented with an investment that has made a consistent return without much variance over long periods of time, it may not be legitimate.

■ All reward, no risk situations – there is always risk wherever there is reward. Don’t be fooled by an investment that has no risk and continues to make significant returns. This type of unicorn investment is very rare and usually not one that is legal or honest. Every investment carries with it some risk. If you are enticed by the promise of high returns with little risk, it’s time to take a step back. It’s easy to let yourself daydream about financial freedom and plan what you will do with a financial windfall. More likely, you will lose big in such a scenario. Take your time when it comes to making any investment! And another red flag is a seller or broker that pressures you to make a decision right away. It’s a good idea to approach anyone who tells you not to worry about the details with some skepticism. 

■ Sellers who do not hold the proper license – we recommend only working with sellers and brokers who are properly credentialed. Look into the regulations in your area and be sure that your broker or other seller has the licenses that are required. Do a little more digging to ensure that they don’t have a past history of working with any fraudulent funds or organizations. 

■ Complex investment strategies that can’t be explained in a straightforward manner – when someone shows you an investment with a great return but can’t explain how that return was made, you are likely being introduced to a Ponzi scheme. Even the most complex financial instruments can be explained. If you hear the phrase “you don’t need to worry about the details”, it’s time to run for the hills.

■ Paperwork errors or inconsistencies – always review your monthly statements. If you begin to notice errors and inconsistencies, it can be a sign that something more nefarious is going on. Be sure to scrutinize your statements each month and call to receive an explanation for any errors. You will also want to request an updated and corrected statement for your records. If you are unable to get anyone to respond to your requests or feel that you are getting the runaround, you have likely invested in a Ponzi scheme.

■ Erratic or skipped payments – payments should be prompt and consistent. If you are receiving yours on a different day every month, or you are receiving an incorrect amount, it’s a serious red flag. Any inaccuracy with payments is a huge red flag and enough of a concern that you should immediately begin the process of having your investment returned to you. If your suspicions are correct, getting your money back will soon seem impossible.

■ Lack of response when you’re ready to cash out – it should be easy enough to reach the Investor Services department of any legitimate firm. If you have questions about your statements, payments, or anything else and are unable to get a straight answer, it’s likely you will run into the same problem when you want to withdraw your funds. Don’t wait to begin the legal process as there are a number of different avenues that your legal counsel can pursue to help you get your money back.

As we mentioned above, the best way to avoid financial fraud is to do your research prior to investing. Unfortunately, it is still possible to get involved in an unsavory transaction even after doing some serious due diligence. If you find yourself in a situation that you fear is a fraud, it’s best to take action immediately. 

It’s often human nature to try to convince ourselves that everything can be explained and it’ll all work out in the end. Taking this approach can see you broke and angry. Taking swift action when you believe that there is evidence of fraud can help you recoup some or all of your money. Don’t wait until you’ve lost everything to take action. 

Signs that you may be involved in a Ponzi Scheme

One of the main red flags that pop up when it comes to illegal financial deals is that the investment is unregistered. While there may be some legitimate reasons for offering unregistered financial options, it is more often than not a sign to avoid the transaction. If you have made an investment that seems to be going off the rails, you’ll want to get your money back as soon as possible. 

When you start noticing that all is not right with your investment, it is quite likely that other investors have too. This can cause a run that makes the situation even worse. Hopefully, you are able to smell a rat before everyone else and get a redemption before the money runs out. Be aware that, in most situations, that’s simply wishful thinking.

One common ploy that Ponzi schemers use is upping the return to keep you in the investment. If you call to have some or all of your money disbursed back to you and you get excuses, sales pitches, or empty promises, you are definitely in a Ponzi scheme! The sooner you hire a lawyer to help you get out of this bad situation, the better.

Your gut feeling that something is wrong is usually spot on. Don’t try to convince yourself that you’re being overly cautious or paranoid. The sooner that you take action the better it will be for you in the long run. 

Next Steps: What to do if you are a victim of fraud

If you have fallen victim to financial fraud, or you fear that you are involved in a shady investment, it’s time to seek legal counsel. You will want to engage an attorney that is well-versed in financial fraud rather than a general lawyer. Because the SEC will likely become involved in the lawsuit proceedings against a Ponzi scheme operator, you will want legal counsel that is familiar with that world. Financial instruments can be complex and confusing unless they are part of your everyday professional life.

When you choose the right lawyer, recovering some or all of your invested money is more likely. There are a number of different ways that an attorney can help you recover funds. These avenues may not be immediately apparent to a general lawyer or someone who isn’t well-versed in the topic. Financial fraud can be complex and difficult to recover from.

The right lawyer can help you build a strong case. They can also pursue a number of different avenues to help you recoup your losses. A general attorney will not have the necessary familiarity with the court system, legal statutes, and financial regulations that a specialist possesses. 

Choosing the right representation is essential. We advise you to sit down for a case evaluation and review to ensure that the law firm you choose has the knowledge and experience you need. Don’t let embarrassment stop you from recovering money that was taken from you in a fraudulent manner. Ponzi schemes and financial fraud are more common than you think.

This means that many otherwise astute investors can fall victim to this crime. Pursuing the perpetrators can help to ensure that other investors won’t have to suffer the same fate.

The Wolper Law firm will fight for you. We have the expertise and knowledge needed to build a strong case for you and see it through to the end. We know the different ways that we can address the situation and avenues to pursue to get your money back. Give our office a call today and learn more about how we can help you receive financial justice. Our firm offers a no-fee, no-obligation consultation and case review. Schedule yours today!