Ponzi Schemes

A Ponzi scheme is a type of investment fraud. It is named after Charles Ponzi, who, in the 1920s, persuaded thousands to send him money to speculate (supposedly) in postage stamps. Ponzi promised a 50% return in just 90 days. At first, he did buy a small number of international postage stamps, but quickly stopped that and began using incoming money from new investors to pay off earlier investors.

The use of money from new investors (unbeknownst to them) to pay purported returns to existing investors is the hallmark of a Ponzi scheme. It’s “taking money from Peter to pay Paul and then taking money from John to pay Peter” and so on. As did Mr. Ponzi, fraud promoters gain custody of investors’ money by promising high returns with little or no risk. They focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses. Money is rarely, if ever, invested in any legitimate investment.

Ponzi schemes require a consistent flow of money from new investors to continue, since they produce legitimate earnings. Ponzi schemes tend to collapse when enough new investors cannot be recruited and/or a large number of investors demand to cash out. The most infamous Ponzi scheme in modern times was perpetrated by Bernard L. Madoff, who is currently serving a 150-year sentence in federal prison. Madoff orchestrated a multi-billion dollar Ponzi scheme that scammed thousands of investors. Madoff was a prominent and respected member of the securities industry. He served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee. Madoff founded his investment advisory firm in 1960.

Ponzi schemes share many, but not necessarily all, of the following red flags of investment fraud:

  • The investment advisor or promoter has custody of the funds invested.
  • Promised or guaranteed high investment returns with little or no risk.
  • Overly consistent returns.
  • Unregistered investments.
  • Unlicensed sellers. Most (but not all – e.g., Madoff) Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive and/or complex strategies.
  • Absence of a prospectus or disclosure statement.
  • Account statement errors.
  • Difficulty receiving payments.

Investors in Ponzi schemes face many risks. First, of course, is the loss of their investment. Second, if an investor actually receives more money back than the investor put in (even if that money is called interest or profits), then the investor is likely to face a “clawback” claim seeking to recover the excess monies that the investor received over what he invested. Recovery of losses sustained in a Ponzi scheme is usually dependent on the recovery of money from third parties that had some relationship or dealings with the crook and/or from other investors who received more than they invested.

If you have investment losses or problems involving ponzi schemes, call the lawyers at Page Perry for experienced representation at (770) 673-0047 or (877) 673-0047 (toll free).