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Ponzi Scheme Red Flags

According to the U.S. Securities and Exchange Commission (SEC), first-time investor or those who have been investing for many years, should always consider some basic questions before committing their hard-earned money to an investment. This is because it sees too many investors who might have avoided trouble and losses if they had asked questions from the start and verified the answers with information from independent sources.

Thus, when considering making an investment, an investor should ask these five questions:

  • Is the seller licensed?
  • Is the investment registered?
  • How do the risks compare with the potential rewards?
  • Do I understand the investment?
  • Where can I turn for help?

One cause of great loss to investors is the investment fraud called “Ponzi scheme.” Named after Charles Ponzi, who resorted to illegal ways of earning huge profits in 1920, Ponzi scheme is a ‘get rich quick’ investment scam wherein a fraudulent firm finances its payout of returns to investors using money paid by new investors.

Ponzi scheme organizers keep their fraudulent firm profitable by soliciting new investors, promising them high returns with little or no risk at all. Ponzi schemes fraudsters need to keep on attracting new money, however, in order to make promised payments to earlier-stage investors (aside from enriching themselves) – this is to create the false appearance that investors are profiting from a legitimate business. Only when it becomes difficult to recruit new investors or when a large number of investors ask to cash out will a Ponzi scheme start collapse.

Since Ponzi schemes share common characteristics, these, most likely, also have the same “red flags,” which, the SEC says, can include (https://www.sec.gov/fast-answers/answersponzihtm.html):

  • High investment returns 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. Investment values tend to go up and down over time, especially those offering potentially 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 do not understand, or for which you cannot get complete information, is a good rule of thumb.
  • Issues with paperwork. Do not accept excuses regarding why you cannot review information about an investment in writing. Also, account statement errors and inconsistencies may be signs that funds are not being invested as promised.
  • Difficulty receiving payments. Be suspicious if you do not receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters routinely encourage participants to “roll over” investments and sometimes promise returns offering even higher returns on the amount rolled over.

When a Ponzi scheme collapses it can be difficult, if not impossible, for investors to get back their money. Thus, if you feel that someone duped you into investing in a Ponzi scheme, it will really be wise to get in touch with investment fraud lawyers right away.

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