A Ponzi scheme is a type of fraud that occurs when the operator of the scheme pays existing investors with purported gains collected from new investors, rather than from actual returns earned by the operator. Oftentimes with Ponzi schemes, investors are led to believe their investments will yield high returns with little or no risk. However, in many Ponzi schemes, fraudsters do not invest the money at all. Instead, the money is used to pay withdrawals or distributions to those who invested earlier. The fraudsters usually keep the rest to support their lavish lifestyles.
Often times, Ponzi schemes are discovered once current investors ask to cash out and the operators are unable to pay, or when operators are unable to recruit enough new investors needed to continue paying the current investors.
This type of investment fraud was named after Charles Ponzi, a fraudster who duped investors in the 1920s with a postage stamp speculation scheme. Ponzi promised his investors that he could provide a 50% return on their investments in just 90 days. He initially purchased a small number of international mail coupons to support his scheme, but then switched to paying old investors with new investor money when he soon realized that his “investment” scheme was not yielding nearly enough money.
Ponzi Scheme Characteristics
Some of the key characteristics of a Ponzi scheme include:
- Unusually high returns promised on original investments
- Vague verbal constructions such as “high-yield investments” or “offshore investment”
- Claims that exclusive investment strategies must be kept secret for competitive purposes
- Promising little or no risk on your investment
- Overly consistent returns
- Unlicensed sellers
- Difficulty receiving payments or “cashing out”
Avoiding Ponzi Schemes
Before considering any investment opportunity, make sure you ask yourself some basic questions for your own safety:
- Am I working with a licensed seller?
- Are the investments registered with the SEC?
- How do my investment risks compare to the potential rewards?
- Can this investment be clearly explained to me?
- Where can I turn to for help with my investments?
If you believe you lost money in a Ponzi scheme, contact the lawyers at Chapman LLC today for a free, no obligation consultation.