Ponzi Schemes Then and Now

Published in All About Seniors Fall/Winter 2020 Midlands Edition

By Anna Rushton

Many seniors have spent years saving and investing – which is a great way to achieve financial security – but also may make them targets for investment fraud, including Ponzi schemes.  A Ponzi scheme is an investment scheme that pays existing investors with funds collected from new investors, but without actual realized returns. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. However, in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves. Ponzi schemes will collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

The term "Ponzi scheme" was coined after a swindler named Charles Ponzi who was caught in 1919 conducting a scheme that was so extensive, it brought national attention to the fraudulent operation for the first time. Although he did not invent the scheme that later came to bear his name, Charles Ponzi's scheme was so vast that his name became associated with it.  Ponzi’s plan took advantage of weakened foreign currencies by purchasing international postal coupons overseas that could be redeemed for U.S. postage stamps.  He would then sell the U.S. stamps and make a profit.  However, Ponzi was unable to reap any meaningful profits from his business plan.  Instead of abandoning the investing method, Ponzi refined his pitch to investors by promising 50% profit on their investment in 90 days. Ponzi paid these investors using money from other investors, rather than with actual profit.  The scheme later collapsed and investors lost about $20 million, which would be around $225 million in today’s dollars.

Unfortunately, Ponzi schemes are alive and well today.  The following are some common red flags of a Ponzi scheme:

• High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.
• Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
• Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company's management, products, services, and finances.
• Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
• Secretive and/or complex strategies. Avoiding investments you do not understand, or for which you cannot get complete information, is a good practice.
• Issues with paperwork. Do not accept excuses regarding why you cannot review information about an investment in writing. Also, account statement errors and inconsistencies may be signs that funds are not being invested as promised.
• Difficulty receiving payments. Be suspicious if you do not receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters routinely encourage participants to "roll over" investments and sometimes promise returns offering even higher returns on the amount rolled over.

Before investing any money, call the South Carolina Securities Division to check the registration status of investment professionals and firms.  A large number of securities schemes are perpetrated by unregistered and unlicensed individuals.  Investors can contact the South Carolina Securities Division at (803) 734-9916 to research a person or firm offering securities or investment advice in South Carolina.

The South Carolina Securities Division has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of policy of the South Carolina Office of the Attorney General, the State of South Carolina, or any division thereof.  For questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

This article was supplied by Anna Rushton, Outreach Coordinator for the South Carolina Securities Division.  For more information, please contact the Securities Division at 803-734-9916.

Anna Rushton is the Community Outreach Coordinator with the Securities Division of the South Carolina Attorney General’s Office. Since joining the office in April of 2015, Anna has coordinated outreach events for senior groups, law enforcement, military personnel, and business associations.  Anna also serves on the Elder Outreach Committee for the North American Securities Administrators Association (NASAA) which helps develop programs to help protect seniors in the US and Canada.  A graduate of Wofford College, Anna earned her BA in Government.