Ponzi Schemes

A Ponzi scheme is a form of fraud where the scammer promises high rates of return with little or no risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investment funds from new investors, whose funds are used to pay earlier backers, as opposed to supporting the underlying enterprise.


These schemes implode when investors start asking for their money back and there isn't enough money to go around.  Accordinly, one of the hallmarks of a Ponzi scheme is that the person running the scam focuses all of his or her energy into attracting new clients to make investments, and strongly discourages any withdrawals.  Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors.

These scams vary from case to case, but typically scammers will promise of high rates of return with little risk.  In many cases they will personally “guarantee” returns or falsely state that all investments are “secured.” Scammers will also promise that monthly payments will be made regardless of market conditions.

Other hallmarks of a Ponzi are very little paperwork, the offering is not registered with state or federal regulators, high-pressure sales tactics, use of church or other “affinity” networks to gain trust, investment strategies that are describes as secret or complex. 

If you feel that you are being pressured to participate in an investment scheme that appears “too good to be true” it may be a Ponzi scheme.  Here are our top ten ways that you can avoid getting scammed:

10. Slow down.  Many people invest after only hearing the pitch and not asking for paperwork.  Watch out for promoters who try to commit you on the spot.  Don’t do it!  Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy.  Be very wary of aggressive sales pitches and deadlines.  Ask the hard questions before you hand over your money, not after.

9.  Do your homework.  Run a simple Google search on the company and its managers, or the individual.  If it involves a company, ask for a private placement memorandum and company financials. Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.

8. Hire an attorney.  Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up. Our team can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.  We will review the offering materials and help you understand what the risks are.  Hiring a good attorney up front is an investment in your investment.

7.  Get it in writing.  I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake.  Don’t do it!  If things go bad later, proper documentation will be critical to me in my efforts to get your money back.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.  (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things.  If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.

6.  Beware of guarantees.  If anyone tells you that your investment is “guaranteed” that should cause some you concern.  All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back. Even if you are approached to loan money and get a promissory note that is usually still considered to be an investment, and such loans can be very risky if not properly secured.  If you are told that the loan or investment is “secured” hire an attorney to document the security interest and verify the collateral.  (See Number 8.)

5.  Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals.  Avoid investing with anyone who credits a highly complex or secretive investing technique or touts unusual success.  Legitimate professionals should be able to explain clearly what they are doing and how they make money.  And if the individual is really making as much money with their strategy as they say they are, they shouldn’t need yours.  These types of “alternative” investments nearly always involve extremely high risk, despite what you are told.

4.  Work through licensed stock brokers or investment advisors.  Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell you the investment, which regulator issued that license and whether the license has ever been revoked or suspended.  A legitimate securities salesperson must be properly licensed under most circumstances. 

3.  Don’t invest with friends and neighbors.  It may seem like doing business with someone you know and trust would be safer, but that is simply not true.  All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good.  Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.

2.  Keep church out of investing.  If someone pitching you an investment casually mentions that they used to be in some high-ranking church position, watch out!  Church activity or affiliation is not relevant to investment decisions, so beware of those who bring these issues up in an investment pitch.

1.  If it sounds too good to be true it probably is.  If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.  The fact that others may have been getting their promised returns does not mean you will.  All Ponzi Schemes eventually implode, and you may be left holding the bag.

If you have been caught up in a Ponzi scheme or are getting pitched on one, we can help! 

Our legal team will help you investigate the case and discuss your recovery options.  In some cases we have brought cases against law firms, accounting firms, and particularly brokerage firms where appropriate. 

Copyright © 2018 by Ray Quinney & Nebeker.  All rights reserved.

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