Ponzi schemes—investment schemes that use money from new investors to pay off earlier investors, with little or no real earnings—have been around for nearly a century, and are still going strong.
Brokers may be liable for Ponzi scheme losses.
While major Ponzi schemes such as the Bernie Madoff scam make headlines, many smaller, less-publicized Ponzi schemes result in investor losses every year.
Ponzi scheme masterminds may face civil and even criminal charges for investment fraud, but this rarely results in investors getting their money back. A more practical recovery strategy for defrauded investors is to bring a claim against the broker and brokerage firm that sold them shares in the Ponzi scheme.
If you suffered investment losses from a Ponzi scheme, contact a lawyer at the Business Trial Group to learn your legal options.
About Ponzi Schemes
Ponzi schemes are named after Charles Ponzi, who scammed thousands of New Englanders in a postage stamp scheme in the 1920s.
The investment vehicles have changed over time, but the basics of a Ponzi scheme remain the same: the scammer offers returns to investors, but rather than reinvesting the money and earning profit-based returns, the scammer simply finds new investors and uses their money to pay off existing investors. In short, the Ponzi schemer robs Peter to pay Paul.
As long as there are fresh investors, the scheme keeps going. At some point, however, new recruits dry up, the mastermind takes the money and runs, or numerous investors request to cash out (often during an economic downturn). When any of these occur, the Ponzi scheme collapses—taking investors down with it.
Old Scheme, New Tricks
Bernie Madoff became a household name as the perpetrator of the largest Ponzi scheme in history. Madoff’s $65 billion fraud hurt large and small investors alike. Only a few fully recouped their losses.
Madoff’s fraud made investors more aware of Ponzi schemes. It also put more pressure on the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) to crack down on Ponzi Schemes, since Madoff flew under regulators’ radar for decades.
Ponzi schemes cost investors billions per year.
But Ponzi schemes are still a major investor threat. In 2016, 59 Ponzi schemes were uncovered in the U.S. with a total of $2.4 billion in losses. Since 2012, about 65 Ponzi schemes per year have been discovered. The mean scheme is worth $6 million.
Recent schemes show that scammers are finding new ways to defraud investors. For example, the SEC has warned about Ponzi schemes using virtual currencies (such as Bitcoin), while FINRA has warned about social media-linked Ponzis.
In 2017, the SEC charged two men with running a Ponzi scheme involving tickets to popular shows like the Broadway musical Hamilton and Adele concerts. Also in 2017, a former NFL player was charged for his role in a Ponzi scheme that targeted professional athletes.
The SEC offers a list of Ponzi scheme red flags that includes:
- An offer of high returns with little or no risks
- Returns that do not go up and down over time
- Investments in unregistered securities
- Account statement errors
- Promoters offering investors even high returns for not cashing out
Recovering Ponzi Scheme Investment Losses
When a Ponzi scheme comes crashing down and the schemer is caught, there may be criminal proceedings that result in assets being returned to defrauded investors. But investors are unlikely to recover more than pennies on the dollar through such an action.
It is often more efficacious for Ponzi scheme victims to pursue securities litigation or arbitration against the broker and/or the brokerage firm that promoted investment in the scheme. A defrauded investor may also have viable claims against parties that aided and abetted the scheme, such as banks, attorneys, or accountants.
Investors who lost money on a fraudulent investment scheme should promptly contact the Business Trial Group. Our Florida Ponzi scheme lawyers will examine your case, explain your rights, and determine the best course of action.