A Ponzi scheme is a phony investment plan where investors are promised high rates of returns on their investment but no real legitimate business operations exist to generate profits or earnings. Instead, early investors are paid from funds put into the scheme by later investors. When the promoter of the scheme can no longer attract new investor money to pay early investors (or he has stolen investor funds to fund his own lifestyle) the scheme collapses.
Ponzi schemes derive their name from criminal financier Charles Ponzi who is credited with creating this fraud back in the 1920s. Charles Ponzi duped thousands of investors through a postage stamp speculation scheme. Ponzi promised to pay investors a 50% return on their investments within 90 days. Ponzi had no legitimate business or investment opportunity in place to generate earnings and used incoming funds from new investors to pay off earlier investors.
Some warning signs associated with Ponzi schemes are:
- Promises of unrealistically high returns with little risk.
- Claims by the promoter that the investment opportunity is extremely complex and usually only available to large overseas institutional investors like foreign banks and insurance companies.
- Requirement by the promoter that investors not discuss the investment with third parties and keep all aspects of the investment confidential.
- Representations by the promoter that investor funds are never at risk and are always held in an escrow account.
- Lack of transparency/refusal of the promoter to disclose to investors the location of investor funds or how the funds have been invested.
- Opportunity to reinvest promised payments at increasingly higher rates of return.
- Inability to pay investors requested withdrawals or refusal to allow investors to cash out their investments.
Let me know if I can be of further assistance to you.
J. Michael Bishop, JD
Smiley Bishop & Porter, LLP
Atlanta, GA 30338