Everyone has heard the old adage, If it sounds too good to be true, it probably is. That tried-and-true advice is still what local lawyers recommend when it comes to investing your money—and avoiding financial scams, namely Ponzi schemes.
A typical Ponzi scheme involves a promoter offering a non-existent concept as a great investment opportunity—that will make you rich quick. Once the first investor bites, the promoter pays him off with money obtained from a second investor; and this pattern continues, creating the illusion that the investment is working as early investors gain large returns quickly. But soon, the schemer begins siphoning off major dollars for himself, explains Larry Harris of Polsinelli. “Eventually, every scheme is going to fall apart because they can’t cover the money that they’re stealing as it keeps growing.”
Today’s investors are familiar with major Ponzi schemes, such as Bernie Madoff’s widely publicized multi-billion-dollar scandal. And they may have even heard of how the scheme received its name—Charles Ponzi, an immigrant who cheated American investors out of major money in the 1920s. Still, some can be lured in by the promise of big profits. “We have defended a number of these cases, and they have happened fairly consistently over the last three decades,” notes N. Scott Rosenblum of Rosenblum, Schwartz, Rogers & Glass.
So, to avoid becoming victimized by a Ponzi scheme, Harris recommends posing these pertinent questions:
• Is this deal too good to be true?
• Why was I chosen to be an investor?
• Why do the traders need outside money at all, if the trades are so profitable?
• Why is such secrecy necessary?
• Has anyone I know heard of this trading program?
Rosenblum says potential investors should do their due diligence before jumping into a deal. “Any time you start investing your money, you certainly have to do your homework. Request a resume, references, talk to a lawyer and other business professionals, and ask for past performance.” When evaluating a potential investment, Harris agrees it’s important to seek help from a trusted adviser who has expertise in financial matters—an accountant, lawyer, stock broker or banker.
And attorneys remind investors always to be aware of red flags:
• Financial statements you’re given don’t add up.
• No one you know has heard of the investment program.
• You try to withdraw money and the promoter delays it.
For those who do fall prey to a Ponzi scheme, there are some steps you can take to minimize the damage. An attorney can help you file a lawsuit, or connect with state or federal prosecutors who handle white-collar crime, says Thomas SanFilippo of Thomas SanFilippo & Associates. Security-fraud perpetrators are facing felony charges and significant jail time—typically seven years, or a $10,000 fine, plus restitution, he adds.
The bottom line is, once you realize you have been scammed, act on the situation, SanFilippo notes. “People who engage in security fraud often have already spent the money on boats and trips, etc., so the money will be unrecoverable—that’s why you want to take immediate action. Don’t take it up with the perpetrator; talk with an impartial third-party attorney who can give a full assessment.”
For more information on how to avoid or rectify financial scams such as Ponzi schemes, visit: