Ponzi Schemes: Red Flags to Look Out For

Business Advisors|Fraud/Investigative & Forensic Accounting|Public Companies

By Tom Pratt

Most have read or heard news of the huge sums of money that investors lost through the fraudulent “Ponzi scheme” infamously run by Bernard Madoff.  The Madoff scheme unraveled in 2008, causing losses reported between $20 and $65 billion – the largest losses from such a scheme in history.  Unfortunately, the Madoff scheme was not the first, nor will it be the last Ponzi scheme operated in the United States, or in the world. 

According to the U.S. Securities and Exchange Commission, a Ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”   Ponzi schemes collapse because they typically have little, if any, legitimate earnings to support the returns promised, and require new investor money to continue to fund the investor returns, the expenses and lifestyle of the promoter, and to cash-out existing investors.

Ponzi Scheme Red Flags

Some “red flags” to look out for, according to the SEC include:

  • High investment returns with little or no risk.  Every investment carries some degree of risk, and higher returns typically involve higher risk.
  • Consistent returns.  Investment values and returns usually fluctuate over time, particularly those offering potentially high returns.
  • Unregistered  investments and unlicensed sellers.  Typically, Ponzi schemes involve investments that have not been registered with the SEC or state regulators, and are sold by unregistered firms or unlicensed individuals.
  • Issues with paperwork.  Repeated errors, inconsistencies and excuses may be signs of trouble.
  • Difficulty receiving payments – such as delayed returns or difficulty in cashing out the investment.  Ponzi scheme promoters routinely encourage participants to “roll over” investments and can offer even higher returns on amounts “rolled over.”

Ponzi schemes have occurred in Pennsylvania and Ohio in various shapes and sizes in recent years.  Our experience in these situations is that the identification and quantification of the losses experienced by an individual investor, and a recovery of any portion of the loss suffered, can be difficult.  In many cases, “accurate” accounting records don’t exist and must be reconstructed.  Also, investors who actually have received payments of phantom returns from the promoter can face potential “claw back” claims – that is, a claim for an investor to refund money previously taken out.

A basic understanding of how scam artists work and learning how to invest safely can help investors to avoid frauds and losses that may result.  Ask questions.  Perform research.  As the old saying goes, if it sounds too good to be true, it probably is.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.