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What is a Ponzi Scheme and How You Can Protect Yourself

In recent years, the cases involving Bernard Madoff and other similar scam artists have made Ponzi schemes headlines in recent years. In March of 2009, Madoff pled guilty in federal court for running a massive Ponzi scheme that is said to be by far the largest fraud of this type in U.S. history, possibly involving more than $64 billion. Each year, Ponzi schemes cause thousands of unsuspecting investors financial devastation.

A Ponzi scheme, named for Charles Ponzi who used the investment scam involving international coupons for postage stamps in the 1920s, is a fraudulent investment scam in which the scam artist promises high returns on investments and then pays investors with the money generated from other investors. This type of operation does not earn any real money from financial investments. Besides being illegal, Ponzi schemes are doomed to collapse eventually, when the scam artist runs out of new investors.

The number of Ponzi schemes is growing throughout the United States. In 2010, for example, the SEC filed 47 enforcement actions that involved Ponzi schemes. One of those schemes, involving Medical Capital Holdings, included approximately $77 million in private placements. The company was charged with lying to investors to gain backing without disclosing approximately $1.2 billion in outstanding notes and a whopping $993 million in defaulted notes. This scheme, and others like it, involve deceiving investors with fraudulent information about the investment and promising high returns regardless of market conditions.

Protecting Yourself From Ponzi Schemes

It is essential for investors to investigate any opportunities before entrusting their money in an investment. Fortunately, there are things that can be done to help protect investors from experiencing the financial devastation that results from a Ponzi scheme.

  • Investors who are concerned about the validity of an investment should consult with an investment fraud attorney who will evaluate the details of the investment before committing their funds.
  • Investors should only conduct financial business with firms or individuals who are registered with the Financial Industry Regulatory Authority (FINRA).
  • Investors should be suspicious of investments that are reported to be little or no risk or investments that promise positive or high returns regardless of market conditions.
  • When investors have difficulty accessing their account information or withdrawing their funds, it is likely a cause for concern.

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