We’ve entered a new era of Ponzi schemes. A record number of the scams have been estimated in 2023 alone, an amount that doubled in two years’ time. Therefore, it’s more critical than ever to have your guard up.
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Many of us are aware of Ponzi schemes largely due to Bernie Madoff. Rightfully so, since he defrauded at least $50 million from a group of 4,800 or so victims in the early 2000s. A Ponzi scheme is a type of investment fraud in which the money isn’t actually invested. Instead, as Investopedia explains, “The scam artist concentrates on attracting more investors [similar to a pyramid scheme]. A growing number of victims is needed to pay out the supposed profits being distributed to earlier investors…When the flow of new investment slows, the scam artist doesn’t have enough money to pay out those supposed profits. That’s when the Ponzi scheme collapses.” For Madoff, it was the 2008 market crash that exposed the fraud.
The Ponzi Scheme
Namesake Charles Ponzi made the practice famous in 1920 by exploiting U.S. postage coupons and exchange rates. These days, Ponzi schemes often target social media users, the elderly, and digital currency holders.
Social media influencer Tyler Bossetti recently pleaded guilty to wire fraud and aiding in the filing of false tax documents as a result of a real estate Ponzi scheme that ran from 2019 to 2023, utilizing platforms such as Facebook and YouTube. Victims were led to believe their money would be used in a property flipping venture that would net returns of 30% or more. Instead, says investigators, the money was used to fund Bossetti personally—for a condo, cars, travel, cryptocurrency—and certainly not real estate investments.
Other recent scams flagged by authorities include virtual currency investments promising “high returns for getting in on the ground floor of a growing Internet phenomenon” and investment pitches specifically targeting seniors, sometimes employing very traditional tactics, such as investment seminars.
How can you tell it’s a Ponzi scheme? The U.S. Securities and Exchange Commission (SEC) has shared the following red flags:
- High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
- Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
- Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
- Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
- Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
- Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
Tips and complaints can be sent to the SEC (see this page for instructions). It’s also important to let your CPA know about your investments—they may spot red flags before it becomes a giant hole in your bank account. If you do become a target, a CPA can help you navigate IRS guidance for victims of Ponzi schemes so that you can better determine the tricky timing (since you likely lost money well before you realized it) and the amount of actual losses.