Ponzi Schemes: 7 Warning Signs from the SEC

Do you know how to spot Ponzi Schemes? Are you aware of the warning signs?

Recently, a Long Island firm lied to investors about having connections to Jay Z’s entertainment company, Roc Nation, and allegedly defrauded investors out of $70 million. More details can be found here.

In furtherance of the above, please find additional information related to Ponzi schemes, including how to identify them and how to obtain the best possible outcome once you have recognized you may be a victim.

According to the SEC, a Ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” The single largest Ponzi scheme in the US involved Bernie Madoff, who fabricated almost $65 billion in gains for investors.

Ponzi schemes often promise very high returns with little to no risk and eventually collapse when there are little to no new investors to cover the cash payments promised to other investors.

According to the Securities and Exchange Commission, here are 7 common warning signs:

1) High investment returns with little to no risk – If an investment advisor is using the word “guarantee” and gives promises of little to no risk, you may be dealing with a Ponzi scheme.

2) Overly consistent returns – Most investment products fluctuate with the stock market depending on investment characteristics. If an advisor is showing you profits that continue to generate high returns in all market conditions, be skeptical, you may be dealing with a Ponzi scheme.

3) Unregistered investments – Ponzi schemes tend to be unregistered with the SEC and state regulators. Registration is essential because it provides potential investors with access to critical information regarding management, services, finances, and products. If a firm does not register its investments, ask questions and find out why.

4) Unlicensed representatives – Federal and state securities laws require investment professionals and their firms to be licensed and registered. Typically, Ponzi schemes involve unlicensed individuals or unregistered firms.

5) Secretive and sophisticated strategies – Ponzi schemes tend to seem complicated as the fraudulent players seek to avoid detection. If you don’t understand an investment, or you cannot access the information you need, you probably need to stay away from that product.

6) Paperwork issues – If you are having an issue with paperwork, or there are inconsistencies in account statements, be suspicious as the funds may be in jeopardy. In the case of Bernie Madoff, according to the indictment, when Madoff determined a customer’s return, a back office worker would enter a false trade report with a previous date, and then enter a fake closing trade in an amount to produce the required profit.

7) Payment difficulties – Many Ponzi scheme promoters encourage participants to “roll over” investments. If you have trouble receiving payment or cashing out your investment, you may be involved with a Ponzi scheme.

Due to the complexities involved with Ponzi schemes, it is important you retain experienced attorneys once you have reason to believe you have been defrauded. At DWH Legal, our attorneys understand the nature and the financial ramifications of securities fraud, as well as the stresses it causes investors. We will work to recover your losses. If you think you are the victim of securities fraud, please contact us for a free no-commitment evaluation of your situation.