The Shocking State of Securities Fraud

And how to avoid being a Ponzi scheme victim

In 2017, 58 years of jail and prison time were handed out to perpetrators of 18 Ponzi schemes in the United States. In 2016, statistics showed that 59 Ponzi schemes were uncovered, totaling more than $2.4 billion in losses.

The operators of these schemes often target highly educated people with disposable incomes. Unsophisticated investors, with their large amounts of capital, are the ideal bait for these fraudsters.

What is a Ponzi scheme?

Named after Charles Ponzi, a 20th century swindler, a Ponzi operates thusly: an operator promises investors high returns, but, rather than investing the funds, they use them to pay off debts from previously duped investors, all the while taking a cut for themselves. As the scheme progresses, the operator must pull in more and more unwitting pawns; the damages and monetary amounts grow exponentially.

The largest Ponzi scheme ever uncovered was run by Bernard “Bernie” Madoff. At the time of his arrest in 2008, he had made off with approximately $65 billion in fraudulent money.

Recently, fraudsters have been selling investors on making money off the secondary ticket market for hot performances like Hamilton and Bob Dylan, and sporting events like the U.S. Open. The perpetrators of this scheme reportedly made more than $81 million off of more than 125 victims.

What should we look out for?

The Securities and Exchange Commission (SEC) warns that these schemes often promise high returns with low risk. People should investigate the histories of anybody taking their money to make sure they are registered with the SEC, and that they aren’t promising consistent returns all the time. The SEC’s investor protection website is a good starting point.

What is being done to stop these schemes?

The SEC and the Financial Industry Regulatory Authority (FINRA) manage and investigate whistleblower claims on fraudulent scammers. The Financial Times reports that often the investigations into these schemes are not very difficult—that a bit of common sense and the right questions typically uncover this fraud quite easily.

The reality of the situation is that most Ponzi schemes are uncovered when investors attempt to take their money out of the market in a downturn. When they attempt to do so, they are unfortunately left with nothing. Currently in the beginning of 2018 the reports from the Wall Street Journal showing the highest recorded closing of the DOW at 25000.

What can I do if I suspect I’m a victim of a Ponzi scheme?

If searching through the SEC and FINRA’S websites has you worried, consult a securities fraud attorney to investigate and protect what may be left of your investment dollars. For more information about this area, read our securities and corporate finance law overview.

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