In late 2008, at the onset of the Great Recession, news of Bernie Madoff’s Ponzi scheme exploded into the headlines. Across the nation, people from all professional and economic backgrounds were rushing to liquidate investment funds. Madoff’s clients were no exception. As the market’s decline accelerated, his investors tried to withdraw funds, only to find that his scheme left them bilked.
A Ponzi scheme is type of investment fraud that pays existing clients with funds collected from new investors. Ponzi scheme operators lure investors with the promise of unusually high returns. The Madoff scandal is estimated to have swindled investors of $18 billion. As investors are still struggling to recoup more than a decade later, Pennsylvania investors today can benefit from learning how to protect themselves from similar situations.
How can you spot a Ponzi scheme?
While Bernie Madoff is now serving a 150-year prison sentence, there are still Ponzi schemers out there. The following are seven Ponzi scheme red flags:
- Low risk, high return. Be skeptical of an investment pitch that promises little or no financial risk or a guarantee of high returns.
- Unusually consistent returns. Be cautious if you’re offered an investment that touts very consistent returns. Because market values fluctuate with time, so too should your returns.
- Unregistered investments. Ponzi schemes often bypass SEC registration or state regulators. Unregistered investments often deny investors with access to information about the company’s management, products or services.
- Unlicensed sellers. Federal and state securities laws require investment firms and professionals to be registered or licensed.
- Vague and/or complex strategies. It’s a good idea to avoid investments that you don’t understand.
- Paperwork issues. Have a cause for concern if you don’t get regular account statements or note consistent errors.
- Troubles receiving payments. Be dubious if you have difficulty withdrawing money, cashing checks or receiving promised payments.
Ponzi schemes and other financial scams can be challenging to identify, which can result in investors incurring substantial losses over time. Even the most financially savvy people can fall prey to Ponzi schemes. One of the lessons learned from the Bernie Madoff scandal is the importance of due diligence.