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All About Ponzi Schemes

What exactly is a Ponzi scheme?

The Ponzi scheme takes its name from Charles Ponzi, a Boston-based Italian immigrant who scammed tens of thousands of people out of $32 million over eight months in the 1920s. So how did he do it? Ponzi told investors that they could buy international reply coupons (a way to prepay foreign postage) at a discount overseas, and then sell them in the U.S, for a higher price. He promised investors they would double their money. But after a newspaper reported that there weren’t enough coupons for all the investors, the fraud was exposed. It turns out that Ponzi was paying off early investors by selling investments to later investors. Charles Ponzi scammed members of the Italian-American community to which he belonged. This is known as an “affinity scheme.”

Another important example of a Ponzi scheme is the case of Bernie Madoff, the now-infamous former head of Nasdaq who scammed thousands. As he was running out of investor money and with the stock market collapsing around him, Bernie Madoff confessed to the scam in 2008. Over at least 17 years, Bernie Madoff, through the investment arm of Bernard L. Madoff Investment Securities Inc., scammed thousands of people out of $20 billion. When you add in money that people thought they had (fictionalized returns on their fake investments), the scope of the scam rises to $60 billion. The fallout was devastating—not only were wealthy individuals scammed, but many charities and middle-class families were financially decimated. After pleading guilty to securities fraud, wire fraud, and many other charges, Bernie Madoff was sentenced to 150 years in federal prison—the maximum penalty for his offenses.

Know the Warning Signs

How can you protect yourself from falling victim to a Ponzi scheme? The Securities and Exchange Commission implores investors to familiarize themselves with the following warning signs:

  • Brokers who promise high returns with no or little risk to investors
  • Returns that are too consistent
  • Investments that are unregistered
  • Sellers who aren’t properly registered
  • Overly complex strategies
  • Paperwork issues
  • Difficulty receiving payments
  • Difficulty cashing out

Every investment carries risk; that’s the nature of the stock market, with all its ups and downs. So, if a broker comes to you with an investment proposal, promising large returns with little risk to you, you should take a step back and consider the old adage “If it sounds too good to be true, it probably is.”

What if you’re not looking for huge gains and you would just like consistent returns? There’s nothing wrong with that, right? Indeed, consistent returns month after month are every investor’s dream, and fraudsters may prey on that dream. The stock market fluctuates; returns that are too consistent should raise red flags.

Most brokers are registered with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). An unregistered broker should set off immediate alarm bells. Similarly, you should take care to investigate investments that are not registered. While private placements are legitimate (if risky), there are also unscrupulous brokers lurking on the margins of the industry while peddling their questionable investments to unsuspecting investors.

A broker who is engaged in a Ponzi scheme is not employing a complex investment strategy—after all, the Ponzi scheme is a simple scam developed over 100 years ago. The con man, however, may try to tell you, the investor, that their strategy is complex and that you won’t understand it. When pressed, they may become secretive or cagey. This secrecy could extend to paperwork, like if a broker refuses to show you the official paperwork laying out your investments. Your relationship with your broker should be based on trust and mutual respect, and you should stop working with a broker who tries to manipulative you.

When money from investors dries up, so does a Ponzi scheme. For this reason, if investors begin demanding their liquid assets, the con man will likely be reluctant to let this money go. Thus, you may have trouble cashing out your investments or even receiving payments in the first place.

Recent Examples of Ponzi Schemes

Robert Shapiro, the former CEO of the Woodridge Group of Companies, pled guilty on August 8, 2019 to running a Ponzi scheme. He scammed investors out of $25 million to $95 million.  According to the Miami Herald, ““In late 2017, Woodbridge’s real estate dealings crumbled as Shapiro and his company ran out of money to pay old investors with funds from new ones, leading to a bankruptcy filing in Delaware, a crackdown by the Securities and Exchange Commission and a federal indictment….” 9,000 victims—including George Stephanopoulos of ABC News and thousands of retirees—were promised 5 to 10 percent returns on their investments. Returns that seem “too good to be true” and returns that are too consistent (instead of fluctuating with the ups and downs of the market) are two signs of a potential Ponzi scheme.

In 2017, former Fort Lauderdale, Florida attorney Scott Rothstein was convicted of running a $1.2 billion Ponzi scheme. Rothstein, who was known as a larger-than-life character who rubbed elbows with many of Florida’s elite, ran a scam that revolved around settlement payments. He was a sexual harassment lawyer and paid out settlements to victims right away, even though these payments are given to winning plaintiffs over a longer period. He used investor money to compensate victims upfront and promised big returns to investors. But his scam fell apart and Rothstein was sentenced to 50 years in prison.

In September 2013, the SEC charged a woman with running a Ponzi scheme that targeted the Colombian-American community. According to the SEC, “When her scheme began to unravel in 2011, [Jenny E.] Coplan blamed the purported investment broker for the delay in interest payments to investors, telling them the broker held the investors’ funds to cover deficiencies because Coplan had failed to meet certain monthly investment quotas.” Again, delays in payments can be a warning sign of a Ponzi scheme.

In March 2013, the SEC charged Alvin R. Brown with running a Ponzi scheme that targeted seniors. After an elderly investor made an initial investment, Brown convinced the investor, who had dementia and had suffered a stroke, to move his money to an IRA that would invest in a company that was purportedly funding real estate in California and other Western states. The investments were not registered with the SEC. Again, unregistered securities are a warning sign of a potential Ponzi scheme. For more information about how elderly Americans can protect themselves from financial fraud, see “How FINRA Protects Elderly Investors from Financial Exploitation.”

In July 2013, the SEC charged Trendon T. Shavers with running a Ponzi scheme. He targeted investors over an Internet message board by promising investors weekly returns of 7% and by making claims like “the risk is almost 0.” He exchanged investors’ Bitcoin for U.S. currency to finance personal expenses, including his rent. Schemes involving cryptocurrency (like Bitcoin) are on the rise. Fraudsters may think they can get away with schemes involving cryptocurrency because virtual currencies are not as regulated, but all investments—whether they be in U.S. dollars or virtual currencies—remain subject to SEC rules. The SEC’s Office of Investor Education and Advocacy issued an investor alert about Ponzi schemes involving virtual currencies. In their alert, the SEC warns, “Potential investors are often less skeptical of an investment opportunity when assessing something novel, new or ‘cutting-edge.’” While it is easy to get excited by the prospect of new technology, investors should proceed with caution.

What should you do if you’ve been a victim of a Ponzi scheme?

Upon realizing that you may have been the victim of a Ponzi scheme, you might experience a range of emotions—confusion, anger, embarrassment. There is absolutely no need to be embarrassed; you have been the victim of a financial crime. The fraudsters—not you—should be humiliated by their actions.

There may be limited time to try to recover your assets, so don’t delay in contacting an experienced securities attorney. Call (877) 238-4175 or email info@fkesq.com for your free consultation with Marc Fitapelli and Jonathan Kurta.