How Do I Spot a Ponzi Scheme?

Posted By Baldwin Mader Law Group || 8-Nov-2017

Signs of Ponzi Scheme

It is estimated that investment fraud schemes are costing U.S. investors around $40 billion every year. Unsuspecting or inexperienced investors are the most susceptible to investment schemes, and many fall victim to investment fraud, losing hundreds of thousands of dollars in the process.

With 50 years of combined legal experience, our firm has represented hundreds of victims of Ponzi schemes.

Afraid you may have fallen victim to a Ponzi Scheme? Contact the Baldwin Mader Law Group today.

What Is a Ponzi Scheme?

A Ponzi scheme is when a scammer uses funds from new investors to pay the returns to existing investors. There is no real money being generated, and once the scammer is unable to get more new investors, the scheme will fall apart.

Being able to recognize this type of investment fraud is important if you want to avoid losing thousands of your hard-earned money to a scam. The U.S. Securities and Exchange Commission (SEC) has laid out 7 warning signs to alert potential investors to a Ponzi scheme.

7 Red Flags to Spot a Ponzi Scheme

The warning signs of a Ponzi scheme include:

1. Complicated or Secret Investment Strategies

Some of the most infamous Ponzi schemers, including Bernie Madoff, Sam Israel, and Martin Frankel, claimed that they had access to special financial instruments and trading models that were not available to the public.

Their investment strategies were secretive and extremely complex. Thus, if the investment model of a particular investment is too complicated to understand, it may be a warning sign that it is a Ponzi scheme.

2. Promises of High Investment Returns With Very Little or No rRsk

Ponzi schemes often promise a large amount of return for little or no risk. Sometimes, the scammer will guarantee a high rate of return, claiming the investment model is foolproof and sure.

However, in general, the higher the rate of return, the higher the risk. Thus, if an investment promises a high return with no risk, there is a good chance it may be a Ponzi scheme.

3. Unusually Consistent Return Rates

Investment values, especially those with higher returns, tend to fluctuate as the market value rises and falls over time.

However, Ponzi schemes often generate positive and regular returns no matter what the overall market value is. Thus, unusually consistent return rates can alert you to potential fraud.

4. Sellers That Are Unlicensed

Under federal and state securities laws, companies, individuals, and others who sell in the investment market must be licensed and registered.

If you are looking to invest in a company, you must make sure it is licensed with the proper state or federal entity. If a little research reveals that the seller for the investment is not licensed, you should avoid becoming involved in the investment.

5. Investments That Are Unregistered

Federal laws require all investments to be registered with the SEC. They may also be registered with state regulators.

Registered investments provide information to potential investors, including:

Key data regarding the services
Financial status
Products
And management of a particular company

If no information is provided and the investment is not registered, it may be a sign that it is a Ponzi scheme.

6. Payment Problems

Sometimes, those involved in Ponzi schemes may have difficulty receiving payments for promised returns.

They may also have trouble cashing or withdrawing money from the account. Since Ponzi schemes rely on money from new investors to pay the existing investors, issues involving payments may be a warning sign.

7. Paperwork Problems

Ponzi schemes often do not provide detailed information up front to potential investors. Furthermore, investment fraud scams may have errors and inconsistencies in the account information that an alert investor can notice.

If you have trouble obtaining information about the account, or the information provided doesn’t seem quite right, you may be looking at a Ponzi scheme.

How To Avoid Ponzi Schemes

In order to avoid Ponzi schemes, or any investment fraud scam, there are certain steps you can take. First of all, you should exercise common sense, and avoid any investment that exhibits the above warning signs of fraud.

If you are a new investor, it is important to be cautious and wary of unbelievably good investments.

What should you do to avoid Ponzi schemes?

Conduct a thorough investigation of the account
Check to see whether the account is registered
Analyze the risk-reward ratio to determine if the risk seems too low
Get advice from trusted and experienced investors
Make sure to get detailed information of the account
Make sure you clearly understand the investment model

Passionate Representation for Victims of Investment Fraud

At Baldwin Mader Law Group, we have guided hundreds of clients to successful solutions. Our California investment fraud attorneys have a thorough understanding of federal and state laws regarding investment fraud and can help determine if you have been the victim of a Ponzi scheme.

We can:

Discuss your situation
Answer your questions
And walk you through the process

We know you are going through a stressful time. That is why our legal team will work diligently on your behalf every step of the way as you seek a favorable outcome.

Investment Fraud Attorneys