Ponzi Schemes: Know The Facts Before You Invest
Cases involving Bernard Madoff, Medical Capital Holdings, Provident Royalties and Tim Durham of Fair Finance have made Ponzi schemes front-page news – and financial tsunamis for thousands of unsuspecting investors.
By definition, a Ponzi scheme is characterized as a fraudulent investment scam that pays returns to individual investors. The catch is that the returns are not coming from the profits earned by a company or organization but rather from an investor's own money or money paid by other investors. Eventually, a Ponzi scheme is doomed to collapse – typically when no more new investors are available or if a large number of investors want to cash out altogether.
The term “Ponzi scheme” was coined by Charles Ponzi, who used the investing scam back in the 1920s. Ponzi's scheme involved international coupons for postage stamps.
If you've been victimized by a Ponzi scheme, contact us with the name of your broker and/or investment firm and the alleged actions you believe occurred. We will review your case to determine if have a potential claim for recovery.
Modern-day Ponzi scammers employ a variety of techniques to trick investors and keep their investment scam going. In the case of Bernie Madoff, investors were lured by the one-time investment manager and former Nasdaq chairman with the promise of consistently positive returns – even during turbulent market conditions.
Following his arrest in December 2008, the Securities and Exchange Commission (SEC) alleged that Madoff perpetrated his scam by keeping several sets of books along with fake documents and provided phony account statement to investors.
In the end, Madoff's fraud totaled some $50 billion and had global-reaching impact. As for Madoff, he is now serving a 150-year sentence in federal prison.
Ponzi schemes are growing. In 2010, the SEC filed 47 enforcement actions involving Ponzi schemes or Ponzi-like payments. One of those actions involved Medical Capital Holdings.
The SEC charged Medical Capital Holdings with fraud on July 16, 2009, in connection to sales of $77 million of private placements. Among the charges, the SEC accused Medical Capital of lying to backers as it raised and misappropriated millions of dollars of investors' money while failing to disclose information about $1.2 billion in outstanding notes and $993 million in notes that had entered default.
Madoff's fraud and other Ponzi schemes underscore why it is imperative for investors to do their own due diligence before entrusting their money to an investment opportunity. First, it's always a good idea to conduct financial business with individuals and investment firms registered with the Financial Industry Regulatory Authority (FINRA). To determine if a broker or firm is registered with FINRA, go to the Broker Check web site.
Second, be suspect of anyone who “guarantees” a regular, positive or high return on an investment regardless of how the market performs. Also, be on the lookout if a broker tells you an investment has little or no risk.
Third, check your account statements. If a broker tells you there a “problem” in getting information to you about your investment and how it's performing, you should be concerned. The same goes for accessing your money. If you are unable to cash out your investment, you likely have good reason to be suspicious. It's your money, so make sure you thoroughly understand how that money is invested.
Finally, let commonsense rule: If an investment pitch sounds too good to be true, it probably is.