What Are Ponzi Schemes and How Do They Work?
Ponzi selling schemes are recognized by how they actually work, not by how the promoters claim they work. The basic operation of a Ponzi scam is commonly described as “robbing Peter to pay Paul” or a money circle. Early investors are lured into the scheme and their profits are paid with the money invested by later investors. The schemes generally do not have a means of making a profit. The result is that the later investors lose everything when the scheme collapses; and all Ponzi schemes eventually do fail. Even with the Bernard Madoff case (which came to light in January 2009 as the largest Ponzi in history) Ponzi schemes are still being offered to investors. The sad part is that investors are still looking for unrealistic profits in an economic down turn. Therefore these types of frauds continue to exist because a friend told a friend about a program that can pay double digit profits. Without proper due diligence by the investor they hand their hard earned money to someone they don”t know but who promises to make them wealthy. Even famous and intelligent people get caught in the Ponzi scheme and the outcome generally the same the loss of most of their life”s savings.
How to recognize a Ponzi scheme / scam
The Ponzi scheme usually offers abnormally high short-term returns (usually 25% or greater) in a short period of time (3 to 9 months), in order to entice new investors. To keep the scam going an ever-increasing flow of money from investors is required. If someone offers you a return substantially greater than the prevailing bank, stock market and/or US Federal prime interest rate, you can assume it is a scam. In recent history, the best sustainable true rates of return from legal activities is in the 5% to 20% annually. Most long term investors figure that 8% annually is an excellent rate of return. “Doubling your money” in anything less that 5 years can pretty much be assumed to be a scam, or based on illegal insider information. Of course, there are exceptions to this, but they are rarely predictable; and only seen in retrospect.
Are you considering an investment that will yield an unrealistically high rate of return?
Do some due diligence and contact Sage Investigations to help you with your decision.
Ed Martin has investigated and assisted in the prosecution of four major Ponzi schemes in the past and since retirement Ed Martin and Sage has participated with defense attorneys in an attempt to defend two subjects in recent Ponzi schemes. Sage is valuable in helping the subject”s attorneys understand what their client has done, help to consider a plea or if necessary, to help explain the case to a jury. With the existing Federal Sentencing Guidelines being the organizer or leader, having a large numbers of victims and a large amount of misused funds will equate to substantial months in jail. The only thing that can help is to review the financial transactions to reduce the amount of “ponzied” funds under, Setser 5th Circuit opinion.
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