A Ponzi scheme is a type of investment fraud that uses the funds collected from new investors to pay existing investors. Scammers will promise to invest your money in order to generate high returns with little to no risk. However, the fraudsters do not invest the money – instead, they keep it for themselves or pay those who invested earlier to keep them happy.
With little to no valid earnings, Ponzi schemes require a constant flow of new investments to continuously provide returns to earlier investors. These schemes tend to fall apart when it becomes difficult to recruit new investors, or when large numbers of existing investors cash out.
Many Ponzi schemes have characteristics in common. Look out for these red flags.
- A guarantee of high returns with little or no risk. Each and every investment has some degree of risk, and investments yielding higher returns usually involve more risk. Don’t fall for any “guaranteed” investment opportunity.
- A consistent flow of returns. It’s common for investments to go up and down over time. If there is an investment that generates positive returns on a regular basis, regardless of overall market conditions, be skeptical!
- Investmentsthat are not registered. Registration with the SEC or state regulators is necessary for investments as it provides investors with access to important information about the company, its products, services and finances. Ponzi schemes typically involve investments that are not registered so be on the lookout.
- Unlicensed investment professionals. Unlicensed individuals or unregistered firms are usually involved in most Ponzi schemes. It is required by federal and state security laws that investment professionals and firms be licensed or registered.
- Complex and secretive strategies. A good rule of thumb is to avoid investments if you don’t understand them or can’t receive complete information about them. It’s a major red flag if it is too complex to be explained!
- Paperwork issues. If you are not allowed to view official paperwork for your investment, like account statements, that may be a sign that funds are not being invested as promised.
- Difficulty receiving payments. If you have difficulty cashing out or don’t receive a payment, be suspicious. Ponzi scheme scammers may try to prevent investors from cashing out by offering even higher returns for more money.
Investment Fraud Victim Recovery Checklist
If you have fallen victim to a Ponzi scheme, use this checklist to help you recover from the fraudsters.
- Create an investment fraud folder. Collect all relevant documentation regarding the fraud in one file and be sure to keep it in a secure location. The file should the perpetrator's name, contact information, website address, their purported regulatory registration numbers, if they were provided to you, and a timeline of events. Also include the police report and any call notes about the fraud. It’s also helpful to include your most recent credit report to reference.
- Be aware of your rights. Victims of crime have rights. It’s important to learn about your rights in order to better protect yourself. For assistance, check with your state Attorney General for more information. Also review the information on victim rights and financial fraud by the U.S. Department of Justice.
- Report it. File a complaint about the fraud incident to agencies who are able to help.
- S. Securities and Exchange Commission
- Financial Industry Regulatory Authority (FINRA)
- North American Securities Administrators Association
- National Association of Insurance Commissioners
- National Futures Association
- S. Commodity Futures Trading Commission
- Internet Crime Complaint Center
- Federal Trade Commission
- Federal Law Enforcement
- Local Law Enforcement
- Local District Attorney’s Office
- Your state’s Attorney General Consumer Protection Unit
It can be difficult to recover the funds that are lost to fraud, but there are ways to attempt recovery. As a community bank, we are here to help you spot scams to avoid falling victim and get back on your feet if your personal and financial information is compromised or stolen. Check out our other blogs about Privacy & Cybersecurity to help protect yourself from scammers.