Ponzi Scheme

The Ponzi scheme is a special kind and most egregious type of investment fraud. A Ponzi scheme is effected by the use of new investment money to pay false returns to current investors. The scheme feeds on constant flow of new business promising outsized returns from a market which legitimately returns far less. As with Bernard Madoff, the scheme is effected by “cooking the books” and supplying investors with false statements showing false returns. Victims typically rely on the reputation of the entity and are induced in keeping their money invested.

1. You came to the financial advisor due to his/her good reputation;
2. Statements sent on the investment do not come from the regular brokerage firm;
3. The guaranteed percent return is lowered or discontinues altogether;
4. The financial representative stops answering questions as to status and/or health of the investment;
5. Information given from financial adviser is unverifiable.

Only in a good market can the fraudsters pull off a Ponzi scheme. They can involve promissory notes, bond-type investments or illiquid investments that either reinvest interest or dividends or pay interest. Advisors discourage the consumer from looking for the return of their principal short-term.

But a consumer need not be a victim on the scale of the Ponzi Scheme by the likes of Bernard Madoff and others. The amounts lost by an investor can be much smaller but no less devastating. Investors trusting the swindlers can sometimes devote a substantial percentage of their assets or even their life savings in the hopes of either hitting it big or receiving an above-market return on their money. It is so important to do as much due diligence on the proposed investments and the people investing as practicable. But even with good research, a swindler’s true intentions cannot always be realized before making an investment. As might be expected however, cases of this nature may not be taken because assets of the swindlers might have been disposed of or hidden before litigation.

Related to Ponzi Schemes are other types of investment frauds that have other lures, like those based on real estate investment returns, that are also mishandled or misallocated. Investment managers in this sphere might be guilty of something less than fraud but still squander a consumer’s investment nonetheless. Our New York City investment fraud attorneys can help investigate this type of situation.

Numerous cases of this nature come from the close relationship between the consumer-investor and the investment manager. The two sides can sometimes be family, or at least very close friends, even with a history of success together. However, in this firm’s experience, there is no nature or extent of any relationship that is a substitute for plain old due diligence. One has to treat his/her investment as if he/she were a Bank or other financial institution. Specifically, it is essential to expend significant time and even resources on the mere research of the basis of the investment and the strength of the collateral. It would unwise to buy a home without purchasing good insurance in the event of a disaster. So too should be the investors’ commitment to researching every facet of the person, firm or asset which will benefit from their money.

One need only view the multiple episodes of the CNBC show “American Greed” to understand the different shapes and sizes of different frauds gobbling up peoples’ money. Such frauds range from the civil to the criminal, either having devastating consequences. Many involve mortgage frauds, real estate scams, stock market investment scheme and elder abuse to name a few.

In taking a case of this nature, the investment fraud lawyers at our New York City firm first research the feasibility in collecting a judgment at the end of litigation. Sometimes, a fraud lawsuit will at least get the swindler to the table to discuss the possibility of settlement before bankruptcy or other such non-collectability of a defendant. But unfortunately in many cases, money has dried up or has been hidden.