What You Need to Know About Ponzi Schemes

You’ve likely heard of the infamous Ponzi scheme, but you may not know exactly what it entails or why it’s illegal. Named after Charles Ponzi, who designed and operated such a scheme in 1920, this fraudulent moneymaking operation has been around since at least the Roman Empire, and continues to be perpetrated today. A basic overview of Ponzi schemes includes information on how they work, why they’re illegal, and how you can spot one if you’re thinking about investing in a business opportunity that might fall into this category. In this article, we cover everything you need to know about Ponzi Schemes.

What is a Ponzi Scheme?

While many of us have heard of them, we often don’t know exactly what a Ponzi scheme is. Put simply, a Ponzi scheme is an illegal operation that revolves around paying old investors with money from new investors. For a detailed look at how these schemes work and why they ultimately fail, check out our primer on it here. There are three reasons why these schemes continue to fool people: firstly, you can earn a lot of money fast; secondly, they tend to require relatively little skill (if any); and thirdly, they operate in secrecy - which makes it easier for people who have been scammed by them not to tell anyone about it.

How do ponzi schemes work?

A Ponzi scheme is an investment fraud that offers high returns with little risk to investors. The fraudsters behind them entice new investors by paying out profits from funds they receive from newer members. When they run out of newer members, they stop making payments and disappear with everyone’s money. In other words, these are pyramid schemes. Most people have heard of a Ponzi scheme thanks to Bernie Madoff’s huge $65 billion scam that crashed in 2008. To learn more about how ponzi schemes work—and how you can avoid one—read on for some helpful advice.

How can I protect myself?

The first line of defense is avoiding investments that are overly complex, where you have little or no understanding of what’s really going on. Look for opportunities that seem too good to be true. If it sounds like a secret formula, it probably is. Additionally, avoid investing money with someone who has a history of defrauding investors or lost previous investors money in a similar scheme. And remember, there’s no such thing as easy money—especially when someone else is in charge of protecting your assets.

Common Types of Ponzi Schemes

Here’s a list of common types of Ponzi schemes, organized by type. There are many variations on these themes, so it’s best to read about them in detail. One example: A pure pump and dump scheme has no legitimate product or business; it just pays returns from new investors until it runs out of cash, then collapses. There are more examples at Wikipedia. To protect yourself against Ponzi schemes and other scams, you should always check if an investment is registered with your state securities agency and/or National Association of Securities Dealers (NASD) and if they have any disciplinary actions taken against them. Most importantly—don’t invest money you can’t afford to lose!

Real Life Examples Of Ponzi Schemes That Affected Millions Of People

The infamous Bernie Madoff in 2008, exposed $50 billion Ponzi scheme. Investors were promised super-low returns of 10%, but his firm was actually burning through investor cash at a startling rate. He claimed his returns were good because he kept it conservative, yet he spent lavishly on homes and travel. The oldest known example of a financial fraud is a pyramid scheme that operated around 1100 BC during ancient China's Shang Dynasty. After noticing issues with keeping track of monetary transactions using old shells, they used cowrie shells that they would write an inscription upon before use.

Signs that you’re dealing with a Ponzi scheme

If you have any concerns about your investments, be sure to reach out to a financial advisor or regulatory agency for an expert opinion. There are some telltale signs that you may be dealing with a Ponzi scheme. If someone offering an investment makes these claims: They can earn much higher returns than traditional investments; They claim they’re unique or one of a kind; They promise confidentiality, especially if you are told not to disclose their name or details about their company; and claims that returns come from principal only, with no risk of loss—be suspicious. If it sounds too good to be true, it probably is.

What to do if you are involved in a Ponzi Scheme

The most important action you can take is reporting your suspicions to authorities. There are also a few other actions you should consider. It’s important not to panic and make rash decisions like selling all of your investments, or withdrawing all of your money from a bank account. In fact, it is a good idea to consult an attorney before taking any such drastic measures; there may be additional legal steps you can take in order to protect yourself from further damage. Even if that step does not result in recovering lost funds, legal counsel can help you determine what will be best for moving forward. As with many financial situations, prevention is key; checking into financial matters like investment opportunities carefully and thoroughly will help ensure that you do not lose money in a Ponzi Scheme in the future.

Seek Legal Help For Your Ponzi Scheme Issue

It’s your money, so you need a lawyer who understands how you want it returned. Choose an attorney who has experience with previous cases and successes when it comes to recovering lost funds in financial fraud and Ponzi Scheme issues, as well as dealing with problems regarding probate, tax or other court related issues. Seek Legal Help For Your Ponzi Scheme Issue: It’s your money, so you need a lawyer who understands how you want it returned. Choose an attorney who has experience with previous cases and successes when it comes to recovering lost funds, as well as dealing with problems regarding probate, tax or other court related issues.

Conclusion

This is only a short guide, and there are many steps you should take in order to fully protect yourself from falling victim to these schemes. However, if you pay attention and work with your investment advisor or financial planner, there’s no reason why you shouldn’t see a healthy return on your money over time. You just need to be able to spot a good investment from a Ponzi scheme. This guide has covered all you need to know about Ponzi schemes to help point you in the right direction. Be safe when investing and always use your best judgment.