In 1920, Charles Ponzi promised thousands of New Englanders a 50% return in 90 days by investing in a postage stamp speculation.
Of course, Ponzi used money from new investors to pay off earlier investors to make it appear like investors were getting a great return on their investment. This worked well for Ponzi until his scheme collapsed when many investors asked to cash out at the same time and he could not recruit new investors.
Fast-forward a century later to 2020 and Ponzi scams are at a 10-year high. 2020 is a year of economic uncertainty and ripe for uncovering even more Ponzi scams as fraudsters will not be able to tap new investors during the downturn.
Ponzi Scam Whistleblower Program
The Securities and Exchange Commission (SEC) has a whistleblower program to root out Ponzi schemes and bring enforcement actions with monetary sanctions. If the monetary sanctions are over $1 million, the whistleblower receives a percentage of the sanction as an award — with one of the largest awards paid out in June for $50 million.
Not that we’re all going to go out and bust a Ponzi scheme, but we should still know the red flags for how to spot one and not join the millions of people who were victims of a Ponzi scam just last year.
7 Warning Signs that It’s a Ponzi
Here’s a quick review of the SEC’s warning signs:
- High returns, low risk. Always be suspicious of guaranteed investments.
- Consistent returns. The returns should go up and down with the market.
- Unregistered investments. Always double-check with Iowa Insurance Division to ensure the security is in fact registered.
- Unlicensed sellers. Call the Iowa Insurance Division and make sure the seller is properly licensed.
- Complex strategies. Never make an investment decision without understanding what you are investing in, where your money is going, how it will be used and how you can get it back.
- Paperwork problems. If reporting statements are missing or inaccurate, or you can’t get information about the investment in writing, it could be a Ponzi scam.
- Payments cease. If you don’t receive a payment or are not receiving payments on time, report it to the Iowa Insurance Division.