The last of the red flags for Ponzi schemes are paperwork errors and trouble receiving your payments. If paperwork regarding your investment is filled with errors or misstatements it can mean that someone is trying to intentionally mislead you. If one is having trouble receiving his money from the investment manager, it could throw up a caution sign. This might occur when the Ponzi scheme is starting to fail. Since Ponzi schemes pay their past investors with future investments, this may indicate that the ringleader has been unable to land any investments, which could lead to late payments or not receiving any payments. If the promotor tries to convince you to not cash out and have your investment “gain” more value, he could be attempting to locate funds to provide to you.
As with most frauds, one can also look at the perpetrator himself. For example, it would be out of the ordinary if a low-level worker buys a brand-new Ferrari. One should reference the fraud triangle when trying to figure out why someone would want to commit fraud. If the schemers have the opportunity to steal the money, they rationalize their behavior in a way to make themselves believe what they are doing is not wrong. They might be under pressure from work or from their families. It is important to look at one's means of living. As stated before, one should not go from driving a 1995 beat-up Toyota to a brand-new Mercedes if he did not receive any promotion.
The most prolific Ponzi scheme in history belongs to Bernie Madoff. Bernie Madoff was a stockbroker and investment advisor that was able to run his Ponzi scheme to steal 65 billion dollars away from trusted investors and pocketed around 20 billion dollars. Madoff started his company in the year 1960 when he was 20 years old. By the 1980’s he was making around $100 million a year and by 1990 he was the Chairman of the NASDAQ. As of today, no one is sure when exactly the scheme began. Based on the investigations by government authorities, the scheme began in the 1980s. Frank DiPascali, a top lieutenant to Madoff, told the judge during Madoff’s trial that the fraud began in the late ’80s but was not successful until the years between 1992 and 1993. Madoff himself said the fraud began in 1991. No matter when the fraud started Bernie Madoff was able to convince hundreds of investors to give him money.
There are also other factors to consider when trying to make sure you are not investing in a Ponzi scheme. Based on a New York Times article, “How to Avoid Being Taken in by a Ponzi Scheme,” these red flags will help avoid being taken in. Additionally, there are other factors and research one must do before investing. Thomas Ajamie is a managing partner in Houston law firm, states that it is common for these schemers to target specific groups, mostly groups of people that they can relate to. He has started to refer to fraud as affinity fraud. Bernie Madoff’s scandal included many investors that were Jewish. Ajamie states that the best way to not be scammed is to do your research and figure out who you are giving your money to.
It is interesting and important to look into who schemers target with their Ponzi Schemes. As stated in the paragraph above, the term affinity fraud has been used to explain how some schemers determine who they will target. There are also common demographics that are typically targeted with Ponzi schemes. The older demographic is usually deemed to be more trusting than the typical investor, which makes senior citizens common targets for every kind of fraud and not just Ponzi schemes
What made Madoff’s scheme so impressive was how long he was able to keep the Ponzi scheme running. Some investors were able to catch some of the red flags discussed earlier back in 2001. Harry Markopolos is a forensic accountant who studied Madoff’s financial statements and concluded there was no way that what he was doing was possible without committing fraud. He brought his findings to the SEC three times, once in 2000, another time in 2001and in 2005. He was not taken seriously because he was working for a competitor of Madoff’s at the time. Other investors were also concerned with the auditing company that Bernie Madoff hired. It was a small storefront company; investors thought it was strange considering Madoff’s success. It was also stated that Madoff was falsifying reports to his investors since the scam began.
Even though many red flags were surrounding Bernie Madoff's business, he was able to run this scheme until it fell apart in 2008. When a group of investors asked for their $7 billion to pay for their promised 10% gain on investment, Madoff’s scheme began to fail. He didn’t have the funds to pay them. He was able to avoid detection through his connections to lawmakers and his reputation. Investors believed in him because his public portfolio showed him investing in safe stocks, and his promised returns of 10 percent were consistent but below the S&P 500 stock annual return average of 16.3 percent. Once his scheme was found out, Bernie Madoff was arrested and charged with security fraud.
After a Ponzi scheme has been unraveled and the perpetrator arrested, it might be very difficult for the investor to receive their initial investment back. The victims of Ponzi schemes suffer from the scheme long after it has been discovered. For example, out of the 65 billion dollars of the perceived losses, the victims lost to Bernie Madoff, only 11.2 billion dollars were redistributed to the victims. In another Ponzi scheme operated by Thomas Petters for 3.7 billion dollars, the victims shared a total distribution of 270 million dollars. Not only will the victims not receive their full investment, but they also will typically not receive anything until years after the perpetrator has been arrested. It is not atypical for an investor to provide their life savings to fund these schemes and to be left within ruins with nothing once the schemer is arrested.
The operator of a scheme may be charged with multiple criminal offenses and these criminal charges may vary depending on the magnitude of the Ponzi scheme. Ponzi schemes usually carry an offense of securities fraud or mail fraud, but some schemers can also be charged with wire fraud or commodities fraud. The most common charge is securities fraud which is defined by the FBI as, “wide range of illegal activity which involves using deception of investors by the manipulation of financial markets (FBI.gov)”. The length of the charge varies depending on the size of the scheme. For example, Bernie Madoff received a 150-year prison sentence and Thomas Petters was sentenced to 50 years for his Ponzi scheme of 3.7 billion dollars.
Since the arrest of Bernie Madoff, schemers have been using different strategies to enlist investors in their Ponzi schemes. In the past 10 years, there has been a 50 percent increase in prosecuted Ponzi scheme cases. These have stolen 31 billion dollars from their victims. The 31 billion dollars stolen is a steep increase from the cumulative total of 8.5 billion dollars before Madoff was caught. Before Bernie Madoff, these schemers were “pitching secretive, market-beating stock strategies” while new schemers are selling natural resource mining and cryptocurrencies. The schemers have adapted their sales strategies, but the crimes are still fraud. Perpetrators are trying to use society’s current interests to convince investors to fund their schemes. Daniel Christian Stanley Powell ran a Ponzi scheme where he promised generous returns if gold mines were invested in. The new schemes have also been promising lower returns from the investment instead of older schemes promising a much more substantial return on investment. Using the strategy of low returns helps make the investment more believable than if promised investments north of 15 percent.
One new case demonstrates how schemers are using new strategies to operate their Ponzi schemes. David Saffron has been caught stealing 11 million dollars from investors through a Ponzi scheme where he told investors that he would provide them with a 300% increase on investment. He explained that he would use bitcoin as investments. Once investors were not able to receive any of their money in return, it was discovered that he was running a Ponzi scheme and was arrested.
This scheme happened when bitcoin had an enormous increase in its price, and everyone wanted to have an opportunity to increase their investment. Bitcoin was and currently still is an unregulated market, which makes it easier for scammers to take advantage of unknowledgeable investors. This is just one example of how new schemers are trying to think of inventive ways to scam investors. Many investors became wary of investing in such funds promising consistently high returns. Ponzi schemes will continue evolving to ensure that this scheme will be successful in the future.
Ponzi schemes have been around for more than 100 years, and they are not going to go away. New schemers use previous lucrative cases, like Bernie Madoff, to structure their scheme. The smart criminal schemer uses former schemers as examples of how to run their schemes and improve upon them. New investments are available daily, and it is impossible for investors to completely understand how each company and investment works. Investors must do their research before entrusting their money to anyone. Many signs can show an investor that an investment fund might be a Ponzi scheme or an improper investment. As time goes on, schemers will be able to use new technology and new investments to try and attempt to steal investors’ money.