On behalf of Mihalek Law posted in Securities Law on Friday, November 21, 2014.
The idea behind investing for most people is to make a profit and walk away with more money than they had when they initially invested. As a result, investment opportunities that will generate a high rate of return are often appealing. This is particularly true when the high rate of return is not tied to a lot of risk. Investors who are solicited such offers should be cautious however. The investment opportunity being offered could be a Ponzi scheme.
There are multiple signs that an investment opportunity could be a Ponzi scheme, besides the promise of high returns for little risk. Unlicensed sellers and unregistered investments could be a red flag that an investment is not on the up-and-up. So too are investment strategies that are complex or secretive or investment returns that are overly consistent. Experiencing difficulty in cashing out of the investment or receiving a payment as well as encountering issues with paperwork such as account statement errors could also be a sign.
To work, a Ponzi scheme depends upon constantly attracting new investors. The money the new investors provide is then used to provide returns to earlier investors. Ponzi schemes might work for a long period of time but ultimately fail when enough new investors cannot be found to fund the payments promised to the earlier investors or when investors seek to leave and take their money with them.
Ponzi schemes are a type of investment fraud. Accordingly, they are illegal and those who organize the schemes could face criminal charges. In addition, investors who have lost money in a deal could take legal action as well. While recovering investment funds from a failed Ponzi scheme can be difficult, it is often worth pursuing. Whether an investor relies upon a court-appointed receiver to hopefully send some of the collected funds his or her way, or decides to pursue a claim against those who recommended the investment scheme, working with a lawyer is generally advisable.
Source: U.S. Securities and Exchange Commission, “Ponzi Schemes,” Accessed Nov. 20, 2014