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Ponzi Schemes

Overview - What Is a Ponzi Scheme?

A Ponzi scheme is a classic con game in which early investors in the scheme are paid funds from later investors, thus creating the illusion of legitimacy and solvency. Ponzi schemes are often doomed to failure once the perpetrator of the scheme can no longer pay out investors through newly raised money.

Ponzi schemes get their name from Charles Ponzi, a charismatic Italian immigrant and polished salesman who duped numerous investors into parting with millions of dollars in exchange for the opportunity to supposedly purchase overseas postal reply coupons at a discount, to then be sold in the U.S. at a significant profit. Unbeknownst to these unwitting investors who were promised an enormous 50% return on their arbitrage investment, Ponzi was not putting investment funds to the use he had represented, but instead was paying handsome “returns” to early investors from the proceeds of later investments. Eventually, by July 1920, Ponzi’s fraudulent enterprise began to unravel due to his inability to raise enough new investor money to perpetuate the scheme.

Some Warning Signs of a Ponzi Scheme

Our office encourages investors to be vigilant when committing their hard-earned money to a new investment opportunity. In that regard, the following are some warning signs that every investor should remain mindful of when vetting a potential investment and conducting due diligence:

  • The promise of high returns with guarantees of little or no risk;
  • Overly consistent returns with little or no volatility in the investment;
  • Marketing through friends and family or through an affinity group such as a church, workplace or community organization;
  • Overly complex or indecipherable investment strategies;
  • Unregistered investments;
  • Unlicensed seller or promoter;
  • Suspicious investment documentation with errors;
  • Failing to receive a scheduled payment;
  • Encountering difficulty in exiting an investment and receiving cash.
Can My Broker or Brokerage Firm Be Liable for a Ponzi Scheme Investment?

The short answer is yes. There are two basic avenues to potentially recover money:

  • Selling Away: in certain instances, a financial advisor will engage in the impermissible sale of unregistered securities to unwitting investors. This practice, known as ‘selling away,’ is not allowed under federal and state securities law, and is a violation of applicable FINRA rules.

  • Blue Sky Laws: in addition to the federal securities laws governing brokerage firms and their financial advisors, every state has its own securities laws, known as ‘Blue Sky Laws.’ These laws, which vary by state, all offer a regulatory framework as to how securities may be offered and sold to the public. Based on the respective states’ Blue Sky provisions, various persons and entities involved in the Ponzi scheme may then be found liable for their participation in the enterprise, including assisting in the sale of unregistered securities or aiding and abetting.

The attorneys at Law Office of Christopher J. Gray, P.C. possess considerable experience in successfully representing investors in a variety of forums who have lost considerable sums of money due to financial fraud, including Ponzi schemes. Investors may contact us via the contact form on this website, at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.