- High 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. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
- Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company's management, products, services, and finances.
- Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive, complex strategies. Avoid investments if you don't understand them or can't get complete information about them.
- Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
- Difficulty receiving payments. Be suspicious if you don't receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
Source: http://www.sec.gov/answers/ponzi.htm
10 red flags to avoid being Ponzi scheme victim:
The one fact consistent with nearly all victims of a Ponzi scheme is that they failed to perform the proper due diligence, and, in some cases, did not perform any due diligence.
Many were led by a trusted intermediary from their church, country club, affinity club, etc., who was also led to the belief of consistently high annual returns without doing their own due diligence.
Source: http://www.eisneramper.com/Avoid-Ponzi-Schemes-0710.aspx
Ponzi scheme Red Flags:
10 red flags to avoid being Ponzi scheme victim:
- Funds are deposited directly with the investment adviser and not in a separate custodian accoun
- Funds are deposited in a broker-dealer that is an affiliate of the adviser.
- Monthly brokerage statements are sent by the adviser and not the custodian.
- Adviser's investment returns are consistently good, even in a volatile economy.
- Adviser's returns are consistently the same, year after year.
- Adviser's investment strategy is complex and not clearly explained.
- Adviser's investment strategy is not compatible with either your short-term or long-term goals.
- Adviser claims you are now part of an exclusive club. Exclusivity is not a benefit when trusting someone to manage your money. It is just another red flag.
- Your adviser shares your views regarding politics, religion, sports, etc.
The one fact consistent with nearly all victims of a Ponzi scheme is that they failed to perform the proper due diligence, and, in some cases, did not perform any due diligence.
Many were led by a trusted intermediary from their church, country club, affinity club, etc., who was also led to the belief of consistently high annual returns without doing their own due diligence.
Source: http://www.eisneramper.com/Avoid-Ponzi-Schemes-0710.aspx
Ponzi scheme Red Flags:
- Promoters are not registered to sell investments (Consider doing a background check through Financial Industry Regulatory Authority (FINRA) if the promoter is U.S. based.)
- Promoters have a history of being investigated and/or disciplined for actions related to investments (Google is your best friend for this one.)
- Promoters and/or founders of the business/investment have criminal, bankruptcy, or civil court histories that are troubling (Use PACER to search all federal court records for a nominal fee. State courts generally have their own online systems, and access to them is growing daily.)
- Difficulty in verifying whether there is a legitimate business behind the investment (Again, Google is your friend!)
- Groundbreaking “new technology” or other special (but super secret) methods or assets, which are going to take the world by storm and be the greatest thing since sliced bread
- Complicated alleged business model that prevents an experienced investor from understanding how money is really made.
- The alleged performance of the company is suspiciously higher than competitors or companies in related industries
- No objective third-party information can be found about the company
- Elaborate explanations for why the business cannot be verified
- Unusually high rates of return offered on the investments (Note that this one is the most common across all Ponzi schemes.)
- Returns on investment are guaranteed (Not to be confused with an annuity from a reputable company with a guarantee in the contract.)
- Promoter downplays the amount of risk investors will be exposed to, often using phrases such as “a sure thing”
- Reluctance to provide documentation supporting claims being made about the investment and the business behind it
- Address of the “business” is a mail drop location, virtual office, or small private office that couldn’t possibly hold a business the size that is being claimed (Google Maps is very helpful for this one.)
- Few (if any) employees in the operation other than the founder and/or promoter.
- Background of the principals of the business is mismatched with what the business does (Use Google to find out what kinds of jobs they held previously, and compare it to what they’re supposedly doing now.)
- Company’s alleged success is related to a recent announcement of some sort, rather than historical financial results (This one is even worse if the information in the announcement can’t be verified, and it appears to just be a PR stunt for the benefit of potential investors.)
