January 2, 2021 8 min read

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A century ago, in October 1920, Charles Ponzi was indicted by a federal grand jury for mail fraud. The indictment ended a massive fraud that Ponzi perpetrated upon countless victims, one so infamous that similar frauds perpetrated ever since have come to bear his name: Ponzi Schemes. This anniversary should be a timely reminder for investors planning for their retirement to review their financial statements and retirement goals and critically take stock of the due diligence they conduct when evaluating a new investment opportunity.

The important thing to remember about investing retirement funds is, you do not get a second chance. If an investment goes sour when in your 40s, you have time to recover. When looking at an investment you hope to retire comfortably by, caution is the best strategy.

That is why people looking to invest money targeted toward their retirement need to be extra cautious about getting caught up in a Ponzi scheme.

The practice has been around for hundreds of years—author Charles Dickens wrote about it in two of his books—but this type of scam achieved national notoriety from Charles Ponzi in the 1920s, which is why it is now associated with his name.

What is a Ponzi scheme?

In simplest terms, a Ponzi scheme is where someone, or some firm, offers you a great rate of return on your investment. Once you give them your investment money, for a while, you probably will see a nice dividend or interest payment and think it was a great idea to put your hard-earned retirement money in this company. However, the money you are receiving is typically not from smart investments. Most of it comes from later participants who handed their money over to this person/firm.

The money you thought you invested is mostly misused, some of it pocketed by the people you gave it to, and some sent to previous investors to keep them happy and not ask any questions.

A Ponzi scheme usually looks good in the short-term but eventually collapses since there is nothing, or very little, really backing up the money they put out, like stocks, bonds or investments in real estate (unless you count the yachts, luxury cars, and mansions that the schemer bought with other people’s money).

Do all Ponzi schemes collapse?

Sooner or later, all Ponzi schemes eventually collapse. This is because of fatal flaws that are intrinsic to their business model. Over time it becomes increasingly difficult and ultimately impossible for the scheme to continue.

Three things that typically bring the Ponzi scheme down

1. The scheme runs out of new investors. The scheme is based on continually getting new investors that allow the scammer to pay off the old ones. If there are not enough new people interested, the Ponzi schemer has no money to give the old investors. Suddenly, those big dividend checks are not as big, or not coming at all. Phone calls to the office are not being returned. Emails are replied with excuses about ‘technical problems’ and not to worry, everything is fine. Looking to retain a lawyer might be a smart move if getting suspicious.
    
2. Some investors try to redeem their investments. Asking for your entire investment back also brings it down.  It could be entirely innocent on your part. You like everything about what they are doing, but you decide there is something else you would rather do with that money. Maybe buy a house, help your kids start-up a business or buy a new car. However, when you ask for your account to be closed and the money sent to you, there seems to be a problem. You are constantly put off or told there will be a delay. Many times, you will not get an answer from anybody at their office. At that point you should look for a good lawyer with experience in this kind of fraud.
    
3. A regulator takes action. It could be that the fraudsters approach a prospective investor who happens to be a lawyer, law enforcement agent, or regulator. Or a whistleblower who is an insider working with the fraudster —or the fraudster’s bookkeeper, accountant, or lawyer—realize what’s going on, or become concerned about their personal liability, and contact the government. Or perhaps the fraud files or publishes documents or information that pop up on a regulatory or law enforcement agency, and they start investigating. The most recent famous purveyor of a Ponzi scheme was Bernie Madoff. He fleeced many people, including the owner of the New York Mets baseball team (who later on had to sell it due to financial hardship). Before being caught by the FBI in 2008, it was reported that Madoff fraudulently acquired as much as $65 billion.

Are Ponzi schemes legal?

Absolutely not. It is fraud with a capital ‘F”.

No matter what, a Ponzi scheme eventually collapses. It will get too big to draw enough new investors to cover the old investors. The longer it goes, the more people are hurt. Recognizing as early as possible that this fabulous new investment with great returns is really a fraudulent Ponzi scheme will not only help you recover your money, it will help others as well.

People who run Ponzi schemes are usually slick talkers throwing around a lot of words around and may even show you fancy, complicated charts. How do you tell what it really is?

Related: It’s Time to Talk About Startup Scam Artists

How can I tell if an investment is a Ponzi scheme?

Here are some tell-tale tips that someone is trying to take your money in a Ponzi scheme:

• High investment returns with little or no risk. The old saying “If it is too good to be true, it usually is” certainly works in this case.
• Overly consistent returns. Everyone knows the stock market goes up and down. If you get almost the same rate of return, or are promised such, that is a red flag.
• Unregistered investments. Most Ponzi schemers are unregistered with the SEC or state authorities. To be registered allows private citizens access to information. Asking for credentials is a simple way to check on someone selling investments.
• Unlicensed sellers. All sellers of securities must be registered either federally or by the state. Ask to see their license.
• Secretive or complex strategies. If you cannot understand the investment strategy they lay out, it is them, not you. If you cannot figure out how they make money, they probably are not.
• Issues with paperwork. Get everything in writing. See an investment lawyer if you have suspicions. Giving your retirement money to someone you do not know is not the time for a handshake agreement.
• Difficulty receiving payments. If there are ‘errors’ in your statement or problems with payments, that is a big red flag.

These tips are based in part on admonitions to investors by the Securities & Exchange Commission, the federal agency that regulates the issuance and sale of investments to the public.

Related: Determining if a Biz Opp Is a Scam

What should I do if I invested in a Ponzi scheme?

If you discover you have money in what has turned out to be a Ponzi scheme, there are measures you can take to get your investment back.

As stated before, typically, the earlier you find out, the better.

You should consider reaching out to an experienced securities lawyer. Keep in mind you are likely dealing with a sophisticated operator who may be used to fending off unhappy investors and have many tricks to keep them from their funds.

Another option may be to reach out to a state or federal regulator or a law enforcement agency that may open an investigation into the scheme and the fraudster, and take appropriate action if warranted by the evidence.

Think twice before trying to deal with the issue on your own. Self-help could create more problems than solve. For instance, any money that the scammer might offer you could be money that was just invested by some other victim, who is not aware that his or her investment is going to be used to pay off another investor.

Lastly, if you suspect misconduct, this might be a time to put your records in order and carefully document – or record, if legally permitted – your conversations with the fraudster or his accomplices.

Related: 3 Simple Ways to Sidestep Phone Scams