When an investment promoter pays your investment returns to you using newly-invested money from other investors, the essential characteristic of a Ponzi scheme is present. The beauty of this scheme is that as long as the promoter continually adds new investors, the scheme can look like a successful business indefinitely. As long as the scheme grows, the scheme can go on without investors becoming suspicious. The key to a Ponzi scheme’s success lies in the investor’s principal remaining invested. If too many investors try to make principal withdrawals, then the fact that the principal does not exist will become known.
These characteristics can cause Ponzi schemes to balloon out of control because the scheme must perpetuate itself through continual growth or it will die. Thus, the promoter of the Ponzi scheme must grow the scheme at all times and at all costs. Bernard Madoff targeted charities, hedge funds, banks, wealthy individuals, and universities because these entities rarely sought to withdraw principal while good returns were being paid. For these reasons, schemes like Charles Ponzi’s international reply coupon arbitrage in the 1920s and Bernard Madoff’s arbitrage and stock option scheme from 1991 to 2009 tend to grow to monstrous proportions.
If you have been promised returns that seem “too good to be true” based on the underlying investments, then you may have invested in a Ponzi-type scheme. If the scheme is growing faster than it should, then you may have invested in a Ponzi-type scheme.
Perhaps most importantly, if you have invested in a Ponzi-type scheme, then you need to consult with an attorney who can recover assets due to investment fraud. Time is of the essence in such a situation. Once the scheme is uncovered, it will unravel fast, and those who do not act quickly will be the ones left “holding the bag.”
Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.