How to protect yourself against Ponzi schemes


The Ponzi scheme is an investor’s worst nightmare. The thought of discovering that a trusted associate has absconded with your hard-fought income can keep well-meaning investors from making financial decisions with confidence.

With federal authorities warning that Ponzi schemes are as prevalent as ever, protecting yourself and your finances is imperative. Although uncovering a Ponzi scheme before losing some or all of your principal can be difficult, there are ways that you can attempt prevent yourself from falling victim to investment fraud.

Be wary of too-good-to-be-true

Every investment comes with risk. If a broker offers you an opportunity with a high guaranteed return and little to no risk, your return may be fraudulent. Consistent returns, especially when the market is in constant flux, can indicate that your returns are coming from other investors’ pockets and not real profits.

Check your broker’s history

The Financial Industry Regulatory Authority (FINRA) keeps a list of brokers that have been barred and a database of disciplinary actions against active brokers and financial advisors. Running a cursory background check on your prospective broker can save you time and money.

Check your broker’s registration

FINRA’s database can also tell you whether or not a broker has registered with regulatory agencies like the SEC. Without regulatory oversight, a broker can more easily get away with fraudulent behavior.

Avoid paying out checks to individual brokers

A broker might create undue urgency or capitalize on an existing relationship to have you sign a check to them personally. With their name on the check, the broker could deposit it into a personal account unbeknownst to you.

Secure your assets with legitimate firms

Do not let the broker influence your decision on which firm should hold your assets. Perform your due diligence and confirm the legitimacy of the firm before granting them custody of your funds. Oftentimes, a legitimate firm will even do the heavy lifting for you when a broker begins to manage your funds in a suspicious manner.

Be proactive about your financial safety

When seeking new investment opportunities, cursory research and knowledge of red flags can prevent the mismanagement of your hard-earned assets. If you suspect you have been the victim of a Ponzi scheme, discuss your situation with an experienced financial fraud professional as soon as possible.