Tips To Identify And Avoid Ponzi Schemes Online

Pyramid schemes and Ponzi schemes have been in existence seemingly forever. Back in 1920, a man cheated numerous individuals in a fraudulent investment scheme and ended up getting lots of money out of them. His name was Charles Ponzi. Though many people think Ponzi schemes and pyramid schemes are identical, there are some differences.

At some point in their life, most people will be exposed to pyramid or Ponzi schemes. The activity is actually illegal, and most people don't even recognize the fact that they are in one. They can seem like innocent gift exchanges or games. On the other hand, millions of dollars can be lost. With promises of big returns, some people have forfeited money they've saved for years.

Over $65 billion was defrauded from investors by a man named Bernie Madoff in the early 2000's. It was a Ponzi scheme that made headlines.

While attempting to alert the public to online Ponzi schemes and how to avoid them, we’ll also touch on pyramid schemes here.

What is a Ponzi Scheme? 

The main focus of a Ponzi scheme is to offer low-risk profiles with high returns by creating false investment opportunities. New investor payments are actually what funds any returns because the investments don't exist. Most of the money is actually pocketed by the scammer.

There are two strategies to these types of schemes:

  • Using new investors to pay old investors – To fund any requests to liquidate, the scammer requires continuous new investor sourcing. This is so that payout requests can be met so that an authentic front is presented, but they are discouraged.
  • Deception of investors – The other strategy is the continuous deception of investors looking for honest returns. The success of the investment will be “indicated” using fraudulent documentation such as fake bank statements or portfolio performance.

Once a Ponzi scheme is being exposed or collapsing, the perpetrator will typically take the money and run, or divert funds to cover up any illegal activity. While investors who have been defrauded are typically hesitant to admit that they are the victims of a Ponzi scheme, it is important for victims to come forward so that they can attempt to recover lost investments. 

Pyramid Schemes vs. Ponzi Schemes

Though some people do mistakenly refer to these as Ponzi schemes, there is a slight difference. In both cases, large returns are promised to investing (soon-to-be) victims. But in a pyramid scheme, rather than making money through passive investment, the investor/victim is tasked with getting additional investors to enter the scheme as well. This is supposed to earn larger sums. Because more and more people are recruited into the scam, the ever-increasing layers of individuals give the scheme it's "pyramid" name.

Red Flags & Signs of Online Financial Scams

Often disguised as book exchanges or support efforts, social media schemes can seem fun or innocuous. There are phrases and behaviors to watch out for where online scams and schemes are concerned.

  • A high-pressure environment is created by some scammers. "Quick! Act now! Don't miss out on this sensational opportunity!"
  • A false sense of exclusivity is created by scammers trying to pass off a Ponzi scheme. "I'm only making this offer to a small number of select individuals. You've been specially chosen!"
  • Paid actors or others involved in the scheme may tell you they've had large-scale success by offering false testimony. If they’re too forceful or too pushy, they are a scammer.
  • If they won't answer any questions about their legal requirements or compliance, they are not an honest investor. They should disclose statements, financial plans, proprietary trading information, etc.
  • Scammers will do everything they can to discourage you from getting advice from a third party.
  • Promising consistently positive returns that don't reflect actual stock market conditions or the economy
  • Secretive or complicated strategies that do not seem to make sense

Tips to Avoid Falling Into a Ponzi Scheme

Any time you receive an offer online, be skeptical. Everything can be faked including caller ID displays, website addresses, emails, etc. Even if it's a friend coming to you with a seemingly unbelievable offer, be wary. Scammers may have already hacked their account! Always use due diligence, particularly if you're considering investing a large sum of money.

  • Verify the financial advisor - Make sure the firm or individual is licensed with FINRA, the SEC or another regulatory body. Do your research on the professionals and their experience, fees, track record, etc. You may even want to do a background check on them. 
  • Ask questions - Don't be afraid to ask for details about the investment to know the risks, rewards, success rate, and any other details about the investments. 
  • Follow your instinct - if something does not feel right about the situation, follow your gut. It's better to be safe than sorry when it comes to investing your hard-earned money.

The best words of wisdom when it comes to Ponzi schemes and pyramid schemes – and you've heard it before – "if it seems too good to be true, it probably is!"

Weltz Law Helps Protect Victims of Fraud

Have you lost money to a Ponzi scheme or a pyramid scheme? If so, Weltz Law can assist you. In securities arbitration and litigation, we have over two decades of representation experience. We understand how devastating it can be when you're the victim of a scam. Contact us today to discuss your case.