Ponzi Schemes – How Do You Know Who To Trust?

When we talk about Ponzi schemes, people generally think of Bernie Madoff and not the guy who the scheme was actually named after “Charles Ponzi”. Most people also truly believe that they would never fall for a scam such as this, but honestly the actual victims who suffered this very scheme felt the same way.

Ponzi schemes have specific characteristics which include:

* Promise of a high return on investment with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

* Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

* Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

* Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

* Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.

* Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.

* Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

You can view a broader list of Ponzi scheme warning signs and characteristics from the SEC’s website.

Most people who put large sums of money into an investment whether real estate or an investment broker do so based on trust. Whether they actually know the person they are trusting with their money, or the person was referred to them, somewhere in the sales pitch they were so good at what they do, they gained the trust of the victim. Once they have won that trust, the victim will believe what the scam artist tells them, thinking their money is safe and yielding a high return.

Fraudsters could be anyone. Family, friends, even your Grandma! My best suggestion to anyone who was offered an investment opportunity and is really considering it, never give away more than you can afford to live without. Ponzi schemes seem to be on the rise so if you have friends or family members who are talking about an investment of a lifetime, make sure you put all of your red flags up and really make an honest assessment of who you are trusting with your money.

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