Ponzi Schemes

Ponzi schemes take their name from famous fraudster Charles Ponzi, but the origins of the scam date back much farther. More than 30 years before Ponzi, unscrupulous pitch men were defrauding investors in America. And variations on the scheme are likely as old as investing itself.

The formula of Ponzi Schemes is simple. In essence, investors are encouraged to pour money into a non-existent or otherwise unimpressive company with promises of huge returns. They are then paid those returns using the investments of people who bought in later. It seems too good to be true, and it always is. As Ponzi schemes grow they become unsustainable. And in every instance they collapse, destroying the investment of hundreds or thousands of people who put money in.

On the surface, Ponzi schemes might seem like easy scams to spot and avoid. But over and over again they have lured in even sophisticated investors. And even in the wake of high-profile schemes they continue with the same frequency. Here are a few notable examples from recent history:

Bernie Madoff

This Ponzi scheme has become synonymous with the reckless risk-taking that precipitated the financial collapse of 2008. Madoff was able to lure in a number of high-profile investors and for a time was considered to be the greatest money manager in the country. In reality, he racked up losses of $65 billion and is credited with the largest instance of investment fraud every perpetrated in history.

Allen Stanford

Stanford was able to defraud investors out of $8 billion by using a combination of old-fashioned sales tactics and the information gap involved in off-shore investments. He was arrested in 2009 and sentenced to 110 years in prison.

James David Risher

Despite two previous arrests for securities fraud, Risher was able to perpetrate one of the more heartless Ponzi schemes in recent memory. He extracted $21 million from most elderly and uninformed investors. Some money was invested legitimately, but the majority was used to fund Risher’s lavish lifestyle.

It is important to emphasize that Ponzi schemes come in all forms. They can be large or small, targeted at the rich or poor, and perpetrated by people with sterling credentials. The allure of high rates of return in a short period of time are too tempting for even disciplined investors to resist.

In the Age of the Internet, Ponzi Schemes are Alive and Well

“The term “Ponzi Schemes” derives from the notorious Charles Ponzi, who stole millions of dollars from Boston investors in 1920 and describes a financial fraud which is perpetrated by utilizing monies obtained under false pretenses from subsequent investors to pay “interest” or “dividends” and return of principal to earlier investors who have no reason to suspect that no legitimate enterprise is actually generating revenues to make these payments.

Ponzi Schemes Collapse by Design. When They do, Investors Lose Billions

A Ponzi scheme will only last as long as there are new investors who part with their investment funds anticipating unusually high returns. Eventually, the house of cards will have to collapse usually leaving the later-in-time investors holding the bag and the con- artist promoters in jail.”

To help us evaluate your chances for a successful recovery for “Ponzi Schemes” claim we offer a free and confidential claim evaluation.

Ponzi Schemes and 'Sorry Notes'

According to Love Story, being in love means, “Never having to say you’re sorry!” The sellers of “Secured Promissory Notes” many of whom are “financial planners” somehow forgot to convey this important information to their customers who they claim to serve. The Promissory Notes which promised safe double digit annual returns secured by real estate turned out to be another “Grand Illusion.”

Reportedly, the Secured Promissory Notes issued by DBSI in 2005, 2006 and 2008 were found by the Examiner appointed by the Bankruptcy Court to be a large Ponzi Scheme.

A Ponzi scheme is a fraudulent investment scheme or operation whereby abnormally high returns or profits are paid to investors from the money paid in by subsequent, or later in time investors. This varies from the net revenues generated by any real business. It is named after the infamous money hustler Charles Ponzi. A Ponzi scheme usually offers abnormally high short-term returns in order to attract new investors. The wildly high returns that a Ponzi scheme promises to pay require a constantly increasing flow of money from investors in order to maintain the scheme and keep it going.

The system is doomed to collapse because there are no underlying earnings from the money received by the promoter. However, the scheme is frequently interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The SEC on its website has tips to avoid being scammed into a fraudulent promissory note investment. These include being skeptical if the seller tells you that the promissory note is not a security. The types of promissory notes involved in promissory note scams usually are securities and must be registered with either the SEC or your state securities regulator – or they must meet an exemption.

Make sure the seller is properly licensed. Insurance agents can't sell securities – including promissory notes – without a securities license. Beware of promises of "risk free" returns. These claims are usually the bait con artists use to lure their victims. Always remember that if it sounds too good to be true, it probably is. Watch out for promissory notes that are supposedly "insured" or "guaranteed," especially if a foreign insurance company is involved.

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