“Ponzi schemes” may be difficult to detect, and that is by design. The idea of a Ponzi scheme is to entice you with a “too-good-to-be-true” investment scenario, backed up with phony “research” and statistics to further entice and comfort your sense of critical analysis.
Here’s how the United States Securities and Exchange Commission defines a Ponzi scheme: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.”
One of the most famous recent Ponzi schemes that suffered a spectacular and well-publicized collapse was the one perpetrated by Bernie Madoff. Madoff engineered a long-term scheme with upwards of $65 billion of other people’s money. To date, few of Madoff’s investors have recovered their cash. And many of his victims were charitable institutions.
According to Business Insider “To avoid having too many investors reclaim their “profits,” Ponzi schemes encourage them to stay in the game and earn even more money. The “investing strategies” used are vague and/or secretive, which schemers claim is to protect their business. Then all they need to do is tell investors how much they are making periodically, without actually providing any real returns.”
Here are some of the hallmarks of a Ponzi scheme:
- Promises of high returns with little or no risk.
- Unregistered investments.
- Returns that are too consistent over time.
- Unlicensed sellers.
- Complex and secretive strategies.
- Not putting anything in writing – such as verifiable background, history, and credentials of both the staff and the investments.
- Vague or evasive answers about the particulars about the company, the investment, or the staff.
In short, if it seems too good to be true it probably is!
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