What is a Ponzi Scheme?
According to the U.S. Securities and Exchange Commission, Ponzi schemes are a kind of pyramid scheme. A Ponzi scheme is an investment fraud where clients are promised a large profit at little to no risk. Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments. This new income is used to pay original investors their returns, marked as a profit from a legitimate transaction. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When there isn’t enough money to go around, the scheme unravels.
Origin of the Ponzi Scheme
The ruse is named after Charles Ponzi, a 1920s crook who promised New England investors a 40 percent return on their investment in just 90 days, compared with 5 percent in a savings account. Ponzi had planned to make money by taking advantage of the difference in exchange rates between the dollar and other currencies to buy and sell international mail coupons at a profit. His scheme was a huge success, and by May 1920 he had made $420,000(the equivalent of $5.13 million in 2017). By June 1920, people had invested $2.5 million in Ponzi’s scheme and by July he was pulling in a million dollars per week. By the end of July he was approaching a million dollars per day. When the scheme was uncovered, it turned out Ponzi had only purchased about $30 worth of the mail coupons on which the scheme was based.
Ponzi Scheme Red Flags
Most Ponzi schemes share similar characteristics:
- A guaranteed promise of high returns with little risk.
- Consistent flow of returns regardless of market conditions.
- Investments that have not been registered with the Securities and Exchange Commission.
- Investment strategies that are a secret or described as too complex.
- Clients not allowed to view official paperwork for their investment.
- Clients facing difficulties removing their money.
If you or a loved one have already invested in a deal that seems too good to be true, you had better investigate now before it is too late. Starr Austen & Miller has represented hundreds of victims of Ponzi schemes and know what to look for. Please call for a free no obligation consultation.