Put as simply as possible, a Ponzi scheme is an investment fraud in which funds contributed by new investors are used to pay purported “returns” or “profits” to existing, earlier investors. A Ponzi schemer usually attracts new investors by promising to invest their funds in opportunities claimed to generate high returns with little or no risk.
When someone offers you an opportunity to get an above-market fixed rate of return on an investment that he or she claims is perfectly safe, that should be cause for skepticism, if not an immediate, “No thanks, I’ll pass.” Likewise, if someone tells you their money manager has consistently been returning huge profits whether the market goes up or down, ask yourself how likely it is that those profits are real.
As noted above, when Ponzi schemers fish for victims, the lure they use is a promise of consistent above-market profits with little risk of loss. Common sense dictates that such a promise is too good to be true. If you’re offered an investment opportunity that strikes you as “incredible” or “fantastic” or “unbelievable,” remember that those adjectives are used to describe things that are implausible and extreme. The “incredible” promise probably is not credible, the “fantastic” deal most likely is a fantasy, and the “unbelievable” opportunity should be met with disbelief.
We often give this example to make our point. We once represented a couple who had been ripped off by their stockbroker, a former wunderkind who had been exposed as one of the boldest Ponzi schemers in history. In the course of a client meeting, the husband told us that his brother also had lost some money to this crook, but the brother wasn’t interested in pursuing a claim because the amount was relatively small and he was making such tremendous returns in a very exclusive limited partnership deal put together by some other investment manager. The promised return was so impressive, we expressed doubt that the money manager was on the level and suggested that the client’s brother should be concerned. But our client insisted, “This guy has delivered on all of his promises. He seems to be legit.”
He wasn’t. The money manager eventually was convicted of running a Ponzi scheme and was sentenced to prison. And our client’s brother, having failed to learn from the experience of losing money in one Ponzi scheme, had allowed himself to be seduced again.
The lesson is simple. The more wonderful a deal sounds, the more skeptical you should be about its legitimacy. Use your common sense to avoid being victimized in a Ponzi scheme. If you believe you or a loved one have been a victim or are currently involved in a ponzi scheme contact our attorneys today for a free consultation of your legal options.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.