If you're like the majority of people, you'd leap at the chance to put your money into a guaranteed investment that offers above-market returns. However, if a broker or anybody else tries to sell you on such a deal, proceed with care.
You might become a victim of a Ponzi scheme, a sort of deception that has defrauded investors for tens of billions of dollars for almost 100 years.
How to Identify an Investment Scam in 5 Easy Steps
1. Confirm credentials.
2. Avoid chasing "phantom wealth."
3. Ignore the "everyone's doing it" narrative.
4. Refuse to be hurried.
5. Arm yourself with knowledge.
In a typical Ponzi scheme, fraudsters offer very high and/or incredibly consistent profits. And they do – for a time. However, they are not investing in anything.
Instead, they're utilizing funds from new investors to meet their obligations to existing investors, including the exorbitant profits promised to those who "get in on the ground floor."Aside from the original criminal, Charles Ponzi, arguably the most well-known perpetrator of the Ponzi scheme is convicted hedge fund manager Bernie Madoff, who was sentenced to 150 years in jail after being found guilty of participating in a $50 billion-loss operation.
According to the lawsuit filed by the US Attorney's Office against him, Madoff was cited as telling top workers that the operation amounted to "a huge Ponzi scam."
Consider this:
If you believe the threat ended with Madoff's conviction, consider this: The Arizona Attorney General stated in May 2015 that a 57-year-old former Tucson man was sentenced to five years in prison after being convicted of defrauding customers for more than $8 million in an investment scheme involving commercial and residential buildings.
Herbert Ivan Kay utilized fresh investor money to pay for old company debts, liabilities, and investment rights of failing venture capital ventures, according to the attorney general.
Despite the fact that the scam lasted more than 13 years, Kay continued to sell his assets even after his National Association of Securities Dealers securities trading license was revoked in 2004.
A current source of worry is the development of Ponzi schemes through the use of virtual currency such as Bitcoins.
Investment Ponzi schemes, while similar, should not be confused with so-called pyramid scams involving fraudulent multi-level marketing company possibilities. In both situations, money from new members is frequently utilized to compensate those who joined early.
Both will ultimately come apart when the enterprise expands to unsustainable levels. The pyramid, on the other hand, focuses on recruiting members to sell a product, whereas the Ponzi scheme focuses on attracting new investors. Here's how to safeguard yourself:
1. Maintain skepticism
If someone tries to sell you on an investment that promises enormous and/or rapid profits for little or no risk, it might be a scam. For example, before everything came apart, Bernie Madoff gave investors with a steady return of 1-1.5 percent each month for ten years.
Be especially wary if the returns are being created by something you've never heard of or in an impossible-to-follow manner.
2. Be Wary of Unsolicited Offers
Someone unexpectedly approaching you, maybe asking you to an investing seminar, is frequently a warning indicator. Investment scams frequently target the elderly or those nearing or in retirement.
3. Investigate the Seller
Using the Financial Industry Regulatory Authority's (FINRA) BrokerCheck, you may research a broker, financial adviser, brokerage business, and investment advisory firm.
Check to see whether the professional is licensed and for any bad information. BrokerCheck's files on Bernie Madoff and Herbert Ivan Kay are both examples of unfavorable reports.
4. Confirm that the investment is registered.
Ponzi schemes, according to the Securities and Exchange Commission, usually incorporate unregistered investments (SEC). Begin by inquiring of the individual making the investment: Inquire as to why the investment is not registered (not all investments must be registered).
If you're informed it is, check the Securities and Exchange Commission's EDGAR database, your state securities regulator, and FINRA's market data, as recommended by FINRA.
5. Understand That Investment
Never put money into an investment that you do not completely comprehend. There are several online tools, like this one, to assist you understand how to invest and analyze prospects for risk and possible benefit.
Don't make a check to – or create an account with – anybody who refuses to properly answer your inquiries or attempts to discourage them by claiming the investment employs secret, proprietary, or too-complex-for-laymen techniques.
6. Inform Authorities of Wrongdoing
If you believe an investment is a Ponzi scheme or other form of fraud, or if you have been victimized, register a complaint with the Securities and Exchange Commission, FINRA, and your state securities regulator (a list of North American Securities Administrators Association members may be found here).
One indicator that you've invested in a Ponzi scam is being unable to get promised payouts or cash out. According to the SEC, some fraudsters promise even greater profits to deter clients from leaving.
In conclusion
Before giving over your money, be sure you know who you're working with and that you comprehend any investment. Be very cautious if someone contacts you regarding an investment without your permission. If anything doesn't look right, report it to the authorities and let them decide if it's legitimate or not.
Sure, you could lose out on a once-in-a-lifetime chance. But it's unlikely. "If anything sounds too good to be true, it generally is," as the old saying goes.