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Ponzi schemes: How they work and common red flags

| Mar 30, 2021 | White Collar Crimes

White-collar crime in Cleveland, Ohio, refers to a classification of several non-violent crimes, such as securities fraud and money laundering. Ponzi schemes are common securities fraud scams that cause investors to lose money because they seem legitimate. Most Ponzi schemes have some red flags that may point to a scam.

How Ponzi schemes work

Ponzi schemes take their name from the person behind the scam, Charles Ponzi, an Italian swindler in the early 20th century. Ponzi created a money-making scheme by selling postal reply coupons, which especially attracted investors with family in another country. He discovered he could redeem the reply coupons from some countries for a higher rate in the United States.

He promised investors a 50% return in 90 days, then a 50% return in 45 days, but the scam soon failed. Modern Ponzi schemes work similarly, but they may not involve a product. They rely on money from new investors to pay the old investors, who think they are profiting.

Common red flags

A Ponzi scheme commonly promises a high return or consistent returns on investments with little to no risk. No investment comes without risks or with a guarantee of consistent positive returns, regardless of market conditions.

A securities investment opportunity must be registered with the Securities Investment Commission. An honest seller rarely tries to hide information from investors by not registering. A dishonest seller may make excuses not to let investors access paperwork, or the bookkeeping has many errors.

A Ponzi scheme usually involves “top secret strategies” that the investor may not understand or the seller refuses to disclose. Some scammers make it hard to withdraw funds or tell the investors to leave the money in hopes of a better return.

White-collar crimes have devastating results, causing the investor to lose hundreds and thousands of dollars. This is why the government takes these kinds of crimes seriously, but being charged doesn’t mean guilty. A person accused of running a Ponzi scheme needs a good lawyer to help them defend against charges.

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