What is a Ponzi scheme?

Ponzi schemes abound, and many people end up falling victim and losing money through them. Fortunately, the perpetrators of these schemes usually come to justice eventually. Take one recent case in Florida where police arrested five brokers for swindling investors out of $1.2 billion in a Ponzi scheme.

Ponzi schemes have existed in some form or the other since the early 20th century. The basic premise of these schemes involves taking money from investors and promising extraordinary returns. The initial investors will receive said returns, enticing more people to join in. However, the schemer merely takes money from later investors and gives it to early investors. It is vital to maintain a vigilant eye because any opportunity that seems too good to be true likely is. Victims of Ponzi schemes can file lawsuits against the supervising brokerage firm in an attempt to recover assets.

Characteristics of a Ponzi scheme

Promises of high returns with little to no risk are an immediate red flag. Some of the other qualities to watch out for when someone promises to double an investor’s money include the following:

  • Complex strategies: Investors should avoid all investments they do not understand in full.
  • Unlicensed sellers: True investment professionals will have a license from the United States Securities and Exchange Commission.
  • Extremely consistent returns: Returns with standard investments will fluctuate over time.
  • Difficulty cashing out: Investors should have a fairly simple time acquiring their money. With Ponzi schemes, the promoters regularly encourage people to “roll over” their returns.

Steps to unraveling a Ponzi scheme

All it takes is one misstep for the scheme to fall apart. For example, economic downturns, such as what happened with the 2008 financial crisis, can cause investors to want to take out all their money. Since a primary characteristic of a Ponzi scheme is that the promoter makes it difficult to cash out, the scheme can soon come to light.


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