A Ponzi scheme takes place when a business or investment operator uses new investor funds to pay fictitious returns to prior investors. Ponzi schemes are a type of securities fraud, in that investors are relying on false representations that the investment operates legitimately as described and pays real investment returns.
More often than not, a Ponzi scheme begins as a legitimate investment and forms when the operator does not generate enough real profits to continue paying returns to investors. When the operator is too ashamed to tell his investors that the investment is no longer capable of paying the same returns, the operator will begin the Ponzi scheme by using new investor funds to continue paying returns to prior investors. Now the company, which is not performing well to begin with, must pay interest to new and old investors. This extra debt burden makes it almost impossible to get “out of the hole” and become profitable again.
Ponzi schemes can only thrive when they are able to continuously raise new money, otherwise they collapse. In order to continuously raise new money, Ponzi schemes typically offer what appears to be highly attractive returns. However, in reality, these returns are typically too good to be true.
Common red flags of Ponzi schemes include: (1) high investment returns; (2) claims that there is little or no risk involved; (3) very consistent returns; (4) investments that are unregistered with the SEC or state regulators; and (5) the sellers of the investment are unlicensed with securities regulators.
Please contact us for a free and confidential case evaluation if you believe that you are a victim of a Ponzi scheme.