A Ponzi scheme is a fraudulent investing scam in which new investments are used to pay off earlier investors, which creates the appearance that the investment is profitable. In such schemes, an investor is lured into investing money with the promise of high rates of returns with little or no risk. This process continues until no new investors can be found or a large number of investors ask to cash out, and the whole scheme collapses.
The original Ponzi scheme was conducted by a man named Charles Ponzi in 1919, who promised returns of 50% in 45 days or 100% in 90 days if they invested in his postage stamp scheme. The scheme lasted until 1920, and by then people had invested $2.5 million in Ponzi’s scheme. When the scheme collapsed, it turned out that Ponzi had only ever purchased around $30 worth of mail coupons. More recently, Bernie Madoff executed the largest Ponzi scheme in history, in which he defrauded thousands of investors of tens of billions of dollars over at least 17 years. In this scheme, Madoff promised large, steady returns, but instead he deposited client funds into a single bank account, which he used to pay clients who wanted to cash out. However, when he could no longer attract new investors or capital in late 2008 he was forced to reveal his scheme.
A Ponzi scheme may give rise to liability under a number of securities laws including the antifraud provisions the Securities Exchange Act of 1934, as well as the Investment Advisers Act of 1940. Additionally, liability may arise under common law torts such as negligence, negligent misrepresentation, and fraud. Navigating the often complex factual nature of these cases and the variety of securities laws takes a skilled securities fraud attorney.
Some common red flags to look for include: (1) promises that your investment will generate high returns, especially any “guarantee” given that your investment will generate returns; (2) investment returns that do not reflect overall market conditions and that are consistently generating positive returns; (3) an investment that is not registered with the SEC or with state regulators; (4) the investment professional and/or firm is not licensed or registered; (5) the investment is difficult to understand or is shrouded in secrecy; (6) you are given reasons or excuses why you can’t review information about your investment in writing, and/or there are account errors and inconsistencies in the information about your investments; and (7) you have not received a payment or have had difficulty cashing out your investment. If you have seen any of these warning signs or otherwise suspect that you may have invested in a Ponzi scheme, please contact one of our securities fraud class action attorneys at Glancy Prongay & Murray.