Avoiding Ponzi Schemes
With thanks to Bernie Madoff and the recent TV movie about his life, the term Ponzi scheme has become a common phrase in the American vocabulary. But do you know what it means? A Ponzi scheme is a form of investor fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from the money invested by later investors. The bad news is that this form of investor fraud didn’t begin or end with Mr. Madoff. In fact, the whistleblower on the Madoff scandal recently warned of three ongoing Ponzi schemes – one even bigger than the $65 billion Madoff scammed. And since Madoff’s arrest, the U.S. Securities and Exchange Commission (SEC) has taken down over 600 Ponzi schemes, so they’re more common that you’d think.
When you understand the signs of a Ponzi scheme, they can be easy to spot. Here are the red flags the SEC defines to help investors avoid being a victim:
High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.
Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company's management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
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