Ponzi schemes

Ponzi schemes hit highest level in a decade, hinting next ‘investor massacre’ may be near

Ponzi schemes | CNBC | Greg Iacurci | February 25, 2020

60 Ponzi schemes in 2019

Investor money ensnared in alleged Ponzi schemes has hit its highest level in a decade, leading to concern that a booming stock market and de-regulatory agenda are pushing more fraudsters to bilk unsuspecting investors.

State and federal authorities uncovered 60 alleged Ponzi schemes last year with a total of $3.25 billion in investor funds — the largest amount of money unearthed in these scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.

A Ponzi scheme is a type of fraud whereby crooks steal money from investors and mask the theft by funneling returns to clients from funds contributed by newer investors.

Bernard Madoff ran the largest Ponzi scheme in history, a $65 billion scam encompassing thousands of investors that was uncovered in 2008.

Madoff, who is serving a 150-year sentence in federal prison, recently said he was dying from terminal kidney disease and asked a judge to grant him early release.

Ponzi schemes alleged by civil and criminal authorities last year pale in comparison to scams unearthed around the time of the 2008 financial crisis, such as Madoff’s and those of other notorious criminals such as Thomas Petters and Allen Stanford, who ran respective $3.7 billion and $8 billion frauds.

2008: 40 Ponzi schemes, $23 billion of investor funds

In 2008, for example, authorities found 40 Ponzi schemes with a combined $23 billion of investor funds — roughly seven times the amount of funds from last year, according to Ponzitracker[…].

The stock market has been on its longest winning streak in history after emerging from the rubble of the Great Recession.

The S&P 500 stock market index was up 31.5% last year, when reinvested dividends are included, its best annual gain in six years. The only year that saw better annual performance over the past three decades was 1997, when the S&P 500 yielded 33.4%.

[…] the SEC has reduced the number of investigations it has opened. The agency opened 827 investigations in its 2019 fiscal year, which runs through October, a decrease from 869 investigations opened the prior year.

The challenge with Ponzi schemes is that investors are unlikely to know if they’re victims until the stock market crashes, as happened during the financial crisis when clients tried redeeming their money only to realize it wasn’t there, Stoltmann said.

And most of time, investors won’t get all their money back.

 Red flags and tips to protect yourself from potential Ponzi schemes

Here are some red flags and tips to protect yourself from potential Ponzi schemes:

  • Make sure your assets are “custodied,” or held, at a legitimate firm (and not one made up by the broker). These firms are in a position to flag any suspicious activity.

  • If it sounds too good to be true, it probably is. Be wary of brokers promising a high guaranteed return on your investment for little or no risk. A recent Bitcoin Ponzi scheme, for example, promised investors up to 7% interest per week.

  • A static investment return on your account statement, especially during volatile markets, suggests the numbers may be artificial.

  • Avoid brokers who are not “registered” with the SEC or the Financial Industry Regulatory Authority, which are federal regulators for investment advisors and brokers. Investors can check FINRA’s BrokerCheck database to check their registration status.

  • Google a broker’s name and check for reports of past frauds. FINRA’s BrokerCheck database also has reports detailing brokers’ past disciplinary history.

  • Never make a check payable directly to a broker. The broker could deposit that money into a personal bank account without your knowledge.

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