Many gluttonous investors continue to fall for fraudulent schemes promising them eye-popping returns despite increasing awareness and tightening regulations. Ordinarily, any scheme that promises returns higher with less investment risk should trigger skepticism.
Named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme, a Ponzi scheme or investment fraud pays existing investors with funds collected from new investors.
Like Charles Ponzi who had promised investors in New England a 40percent return on their investments in 90 days, compared with then 5percent interest earned in savings accounts, the Ponzi scheme or a pyramid scheme is the oldest and most common type of investment fraud as its organizers often promise to invest your money and generate “high returns” with little or no risk.
The Ponzi scheme with little or no legitimate earnings requires a constant flow of new money to survive. The scheme is essentially a pyramid scheme that operates on the basis of ‘robbing Peter to pay Paul’.
In many ‘Peter-to-Paul scheme’, the fraudsters do not invest the money, instead they use it to pay those who invested earlier and may keep some for themselves.
The promoters of Ponzi schemes pay out high returns ‘as promised’ to build trust with the early investors and encourage new investors. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
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Sadly, investors are often slow to admit that they have fallen victim to a Ponzi scheme but truth is that many Ponzi schemes share common characteristics. Ponzi Schemes offer high returns with little or no risk.
Always ask the promoters their source(s) of earnings for which they pay higher returns. Though some can be fraudulently bold to say that they invest in growth sectors just to entice you and give their scheme the promise of high returns.
Many Ponzi scheme organizers move with the trend. They often use the latest innovation, technology, products or growth industry to entice investors. This makes their victims often less skeptical of such fraudulent investments. Ponzi participants end up losing everything.
Though every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity with little or no risk, it could be fraudulent.
When you are told that not only are the returns high and guaranteed, there are no downsides either, watch! it could be Peter-to-Paul scheme.
Ponzi Schemes offer overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions –it could be a Ponzi. Watch out for unregistered investments, most of them could be fraudulent. Ponzi schemes typically involve investments that are not registered with the Securities and Exchange Commission (SEC) or with other capital market regulators.
In Nigeria, the SEC advised the general public to beware of illegal operators and promoters of Ponzi and other fraudulent schemes. The SEC also advised the public to exercise utmost caution and conduct adequate due diligence –example seeking professional advice and checking the Commission’s website to confirm the registration status of company/individuals marketing any products to them before taking a decision to invest.
Registration is important because it provides investors with access to information about the company’s management, products, services, and finances. When there is no registration, your investment is not guaranteed. Unlicensed promoted.
The Securities and Exchange Commission requires investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms. Ponzi Schemes are always secretive with complex strategies.
You must avoid such ‘investments’ if you don’t understand them or can’t get complete information about them. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put. So be suspicious if you don’t receive a payment or have difficulty cashing out existing one.
Bernard Lawrence Madoff was an American fraudster and financier who ran the largest Ponzi scheme in history, worth about $64.8 billion. Madoff, arguably the most notorious Ponzi scheme artist, was sentenced to 150 years in prison for operating a multibillion-dollar illegal operation. He died in prison on April 14, 2021.
Many capital market regulators are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions.
The key elements of Ponzi scheme are as follows: using new investor funds to pay prior investors; representing that the investor returns are generated from a purported business venture; and employing artificial devices to disguise the lack of economic substance or defer the recognition of economic loss.
Most Ponzi schemes rely on a theoretical business model to produce the touted profitability and superior returns to its investors.
Other theoretical business ventures giving rise to a Ponzi scheme have included stocks, bonds, notes, hedge funds, oil or gas deals, fictitious investments like hybrid animal breeding, crop farming, gold mines, diamonds, precious metals, foreign currency transactions, commodities, high-tech stocks, real estate-based investments, lending related schemes, etc.
Often, investors are slow to admit that they have been the victim of a Ponzi scheme out of fear that: public exposure will create a crisis of confidence that could create a run on the promoter and makes things worse; fear that they will look foolish for being blinded by greed; and fear that if they break rank and blow the whistle, they will be drummed out of the high-interest scheme and blackballed in his professional or social circles. Whatever reasons that drive your feelings not to admit being a victim of Ponzi scheme, here are signs that it is on the verge of being exposed or collapsing.
The promoter may take the money and disappear; transfer investors into a new or existing shell entity that is self-liquidating; create new management, which may include the promoter and/or a select group of investors; sell the business; pay off any investor who complains; and/or try to control, manipulate and divert any regulatory investigation of the scheme and seek investor loyalty in doing so.
