Ponzi Scheme Prevention & Awareness Tips for NY Investors

Investment fraud schemes are estimated to cost US investors around $40 billion per year. Unsuspecting or inexperienced investors are particularly vulnerable, and many fall victim to investment fraud, losing hundreds of thousands of dollars. Even seasoned investors sometimes fail to detect a Ponzi scheme’s[1] operation since some fraudsters create a convincing house of cards.

In this article, a NYC securities litigation lawyer at MDF Law discusses Ponzi schemes and how investors can avoid them.

What Is a Ponzi Scheme?

Ponzi schemes[2], also known as Peter-to-Paul schemes, are investment schemes in which the operator uses new investors’ money to pay returns to previous investors rather than from the purported business venture’s profits. The operator never intends to deposit the funds into a bona fide investment and requires a stringent cycle of new investors to pay off old investors.

The list below outlines the three key characteristics of Ponzi schemes:

1. Utilization of new investor funds to compensate prior investors,
2. Asserting that the investor returns are the result of a fictitious business venture, and
3. Utilizing artificial means to conceal a lack of economic substance or to postpone the recognition of financial loss. Examples of artificial concealment include falsifying accounting entries, fabricating insider transactions, failing to report liabilities, inflating asset values, and fictitious sales.

The Ponzi scheme operator uses these methods to create a show of smoke-and-mirrors, with investors being none the wiser.

What Are the Signs of a Ponzi Scheme?

The warning signs of a Ponzi scheme are clear when you can recognize the patterns. However, you do not want to accuse someone of wrongdoing without adequate evidence preemptively. Ensure you take the time to vet all investments and avoid common pitfalls carefully.

Below, we have outlined the common signs of a Ponzi scheme:

Secretive Practices

Several of the most notorious Ponzi schemers, including the GPB Capital[3] Ponzi scheme, claimed to have access to proprietary financial instruments and trading models not available to the general public. Their investment strategies were highly confidential and intricate. Thus, if an investor’s investment model is too complicated to comprehend, it may be a red flag that the investment is a Ponzi scheme.

High-Yield investments with No Risk

Ponzi schemes frequently offer a high rate of return with little or no risk. Occasionally, the con artist will guarantee a high rate of return, claiming the investment strategy is foolproof and certain. Conversely, in general the greater the rate of return, the greater the risk. Thus, if an investment promises a high rate of return with no risk, it is likely a Ponzi scheme.

Unregistered Investments

All investments must be registered with the SEC under federal law. Additionally, they may be registered with state regulators. Registered investments provide potential investors with information about a company’s services, financial status, products, and management. If no information is provided and the investment is not registered, this could indicate the existence of a Ponzi scheme.

Issues with Paperwork

Often, Ponzi schemes do not provide detailed information to prospective investors upfront. Additionally, investment fraud scams may contain errors and inconsistencies in account information that a vigilant investor can detect. If you are having difficulty obtaining information about the account or if the information provided appears to be incorrect, you may be dealing with a Ponzi scheme.

You can take certain precautions to avoid Ponzi schemes or any other type of investment fraud scam. Use common sense and avoid any investment that demonstrates the warning signs mentioned above. If you are a new investor, it is critical to exercise caution and avoid investments that appear too good to be true.

How to Avoid Ponzi Schemes

An investor should conduct due diligence on all investments. The simplest way to do so is to contact the SEC and inquire about any ongoing investigations by their accountants.

Here are a few other tips[4] for avoiding Ponzi schemes from the outset:

• Ask the operator about their education and background
• Avoid solicitations by telephone or online
• Monitor your investment carefully and consistently review your account
• Obtain and retain written documentation of your investment
• Perform a background check and search the internet about the promoter
• Research the investment to determine proper registration
• Seek assistance from and consult an unbiased, trustworthy third party
• Understand the investment and verify the operator’s claims
• Understand the nature of the underlying business and its operating history

Additionally, before investing in any scheme, one should request the company’s financial records to determine its legitimacy.

How to Report a Ponzi Scheme in New York

You can report a Ponzi scheme in New York by contacting the Office of the New York State Comptroller. Their office allows you to file a complaint online[5]. Be prepared to provide them with your name, address, and contact information, along with a short statement about your evidence and observations.

This action may lead to a more formalized investigation, especially if you play a crucial victim role. Speak with a securities litigation lawyer[6] in New York beforehand to guide you with navigating the legal situation.

Whistleblowers, or their attorneys, must submit information online via the Security and Exchange Commission’s (SEC’s) Whistleblower Portal[7] or by mailing a Form TCR[8]. Before submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC’s whistleblower rules.

Get Legal Help From an NYC Securities Litigation Lawyer

If you suspect that you are a Ponzi scheme victim or are trying to recuperate losses, an NYC securities litigation lawyer at MDF Law can help. We have decades of legal experience successfully handling litigation and arbitration matters throughout New York. Get in touch with our legal team now by calling (800) 767-8040[9] or message us confidentially here[10].