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What is a Ponzi scheme?

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A Ponzi scheme is a faulty investment opportunity proposed by a company or individual. Ponzi scheme investors are assured they will receive a large profit with little to no risk—they do not know that it is a scam.

How does a Ponzi scheme work?

Ponzi schemes generate returns for investors by continuously acquiring new investors. The person running the Ponzi scheme takes the money from new investors and gives it to the old investors claiming it is a return on their investment. The old investors think that their investments are growing and do not know that the money they are receiving is money received from other investors.

The goal of a Ponzi scheme is to get the older investors to contribute more money based on the profit they are making. The more money invested in the Ponzi scheme, the more money the Ponzi scheme administrator keeps.

Ponzi scheme administrators focus all their energy on getting new investors. These new investors provide the Ponzi scheme with the money needed to repay earlier investors. Without investments from new parties, the scheme unravels.

Ponzi schemes may be difficult to detect but there are warning signs.

Signs of a Ponzi scheme

  • Promise of high return and little risk
  • Consistent rate of return regardless of the stock market conditions
  • Investment strategies that you do not understand or have not been explained
  • Investor does not have access to investment information or documentation
  • Clients have difficulty removing their money

Ponzi schemes are prevalent and easy to fall for, they can target anyone. Most often, Ponzi scheme administrators start the scam by persuading friends, family or acquaintances to invest. After the Ponzi scheme perpetrator has targeted their inner circle, they may start to target friends and family members of the previously acquired investors.

If you believe you have fallen victim to a Ponzi scheme, seek guidance. An attorney may be able to help you get your money back.