Ponzi Scheme
Candlefocus EditorIn a Ponzi scheme, promoters utilize new or existing investors’ funds to pay earlier backers. False statements about the financial performance of the investment fund is a common method these schemers use to attract new investors and to concretely conceal the “rob Peter to pay Paul” strategy carried out behind closed doors.
Most often, these deceptive business plans are conducted by firms with minimal, or no SEC registration. It is illegal for promoters to guarantee extraordinary gain at low risk, but they might use exaggerated rhetoric to draw in investors. Promoters can also attempt to evade suspicion and make their schemes more attractive by guaranteeing specific returns or accepting foreign payments. That’s why it’s important to be aware of both the problems and warning flags of the Ponzi scheme.
Perhaps the most notorious Ponzi scheme to date was performed by Bernie Madoff, who sold investments but never actually made any legitimate investments for his clients. Through his Ponzi scheme, Madoff deceived thousands of investors out of billions of dollars which made it the largest known Ponzi scheme in history.
Given the insidious nature of Ponzi schemes, financial regulators are working to protect investors and the public from becoming victims of Pyramid schemes. The Securities and Exchange Commission (SEC) provides a list of red flags businesses should be aware of when it comes to potential Ponzi schemes. Of course, due diligence is always the best way to avoid these fraudulent schemes. To protect you and your funds, be sure to thoroughly research any investment you consider before making a decision.