Practicing For Over 30 Years With
Free Initial Consultation

How investigators determine if an investment is a Ponzi scheme

On Behalf of | May 7, 2020 | Criminal law

When investors complain that they’ve been duped out of their money, the authorities sometimes get involved. The complaints could spark an investigation into the possibility of a Ponzi scheme.

In a Ponzi scheme, fraudsters try to recruit others to take part in the promises of a big payday in a short amount of time with only a small degree of risk. In a Ponzi scheme, new recruits (and their money) must constantly be brought in beneath the older recruits. It’s that “new money” that pays the earlier investors and creates the illusion of a profitable enterprise — at least, for a while. Once the number of investors dries up, the Ponzi scheme falls apart.

In investigating the possibility of a Ponzi scheme, authorities also will look for:

  • Investments that aren’t registered. Registration allows investors to tap into information about the company’s officials, services and products offered, and financial standing.
  • Sellers who aren’t licensed. Under state and federal securities laws, investment professionals must be licensed. Unlicensed people or firms typically are a big red flag.
  • Secret investment strategies. Can investors get detailed information about the investment?
  • Paperwork problems. Mistakes on account statements can be another clue that the investment isn’t what it seems to be.
  • Trouble getting promised returns. Are investors given the runaround when they seek to cash out?

Being charged with running a Ponzi scheme is a serious offense, and sometimes, there could have been no intention to defraud someone when an investment goes awry. After all, bad investments do happen. That’s why it’s important to seek legal assistance immediately when suspicions arise that you could have perpetrated a fraud.