Definition of Ponzi Scheme and the Most Notorious Cases

Definition of Ponzi Schemes and the Most Notorious Cases

Unfortunately, financial market fraud is very common. Trading volumes are constantly growing, new brokers appear and old ones are constantly increasing their customer base. The more money that flows through global financial markets, the greater the interest of fraudsters and cybercriminals.

One of the most popular fraudulent ploys ever perpetrated against those interested in making money is the old Ponzi scheme. The scheme only works if you allow yourself to be influenced by the fraudster.

Critical thinking, vigilance, and your own prudence are your main defenses. Next, we'll look at some well-documented examples of this terrible plot, and finally, we'll examine how you can best protect yourself.

What is a Ponzi scheme? Definition

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

The Ponzi scheme is named after Charles Ponzi. In the 1920s, he founded a company that dealt with legal arbitration. However, over time, he began to use money from new clients to settle old obligations that the new clients had nothing to do with.

Charles Ponzi

When the scheme was finally revealed, the case became widely known in the United States and even worldwide, and the press called it "The Ponzi Scheme”. The name stuck to this method of fraud.

The Ponzi scheme usually follows this list:

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Scammers register the platform and convince the first round of customers to invest in the company, also known as “a sure thing”;

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Scammers continue to look for new victims, convincing each group to invest in the get-rich-quick financial plan. As more and more funds are raised, they pay out the profit to the “first” customers who have already invested money. This maintains enthusiasm and demonstrates that the investment plan is a real deal.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Then, they convince investors who received the money to reinvest in the service. Most victims agree because they believe the company is legitimate as long as it pays back the promised profits;

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

As soon as the inflow of new funds stops (or the fraudsters decide they have enough profits in their pockets), they run away with most of the money.

The greediest fraudsters keep exploiting the scheme until everyone stops investing, and since there is no more money, no one receives any more payments and the whole house of cards simply falls apart.

But the planners don't care, because they've been pulling money off the top all the time, so they've already filled their greedy pockets. After that, the company operating under the Ponzi scheme ceases to exist.

 

A fraudulent company works as long as it manages to maintain the illusion of a sustainable business. As soon as clients stop investing, scammers take the money that has already been invested in the platform and register a new project. The old organization is liquidated and it is almost impossible to get a refund.

 Ponzi Schemes: How Do They Work?

The Ponzi scheme has several features. Let's consider them in more detail:

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Scammers offer an excessively high return on investment. Its main task is to awaken in the trader a sense of greed and a desire to make a lot of money easily and quickly;

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

The brokerage or investment platform does not disclose the details of the income earned. Traders will not be able to know the managers' portfolio and cannot control which assets the manager invests in;

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

“Cold calls”. You putschists find open source contacts and call them with investment offers. Calls and contacts on social media can be persistent, and scammers can do this multiple times a day.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Company representatives actively recommend that you do not withdraw funds/profits. Yes, scammers working in the Ponzi scheme pay customers for a certain amount of time, maintaining the mirage of a legitimate and trustworthy company. Withdrawing funds from the system is a problem for them. Therefore, they are trying to convince the investor to reinvest the money in every way.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Lack of license. Scammers usually don't waste time and money getting licenses from trusted regulators. They just get an offshore license, a “certificate of compliance” from a private company, or even work without any permission.

If you notice these signs, you are most likely cooperating with scammers using the Ponzi scheme. You need to be extremely careful with these companies, and if you suspect that you are being offered cooperation with a fraudulent brokerage or investment platform, you'd better refuse or get out fast!

Ponzi Scheme vs Pyramid Scheme

It is important to note the differences between these two paradigms. Both involve the common thread of payments made to previous investors at the expense of subsequent investors. But the main difference is the principle of customer attraction.

The pyramid scheme works in such a way that the users themselves attract new investors. There is a profitable affiliate program, bonuses for people who attract more investors, etc.

Therefore, the main feature of pyramid scheme is decentralization.

The Ponzi scheme is centralized. Representatives of the brokerage or investment platform are committed to attracting clients. The Ponzi scheme is characterized by “aggressive marketing” and such brokers may not have an affiliate program.

Famous examples of Ponzi scheme

The Ponzi scheme is widely used by stockbrokers. fraud. There have even been high-level examples of world practice, where…

Bernie Madoff's Ponzi Scheme

Bernie Madoff's Ponzi Scheme

the ponzi scheme Bernie Madoff  It is one of scams most famous of its kind all over the world. The scheme itself lasted nearly 50 years.

Its founder, Bernard Madoff, was one of the leading American financiers of the mid-XNUMXth century. He was able to defraud large funds like Fairfield Sentry Ltd, Kingate Global Fund Ltd, banks — Santander, HSBC, BNP Paribas and the Royal Bank of Scotland, etc.

A major charity, the Robert I. Lappin Charitable Foundation, after the collapse the coup failed.

In the 1960s, Bernie started his own investment company, Madoff Investment Securities, LLC, which offered clients investment services in stocks and other bonds.

Company representatives called potential customers and offered investments at an attractive interest rate of 12 – 13% per annum.

Madoff was trusted because his company paid consistently and he himself was a co-founder of Nasdaq and held a position on the board of founders.

Representatives of the investment firm assured investors that Madoff Investment Securities LLC's success was due to the use of inside information (Bernie held a high position and had access to non-public trading information).

However, in 2008, the scam was revealed, but only after the entire global economy collapsed. After the global financial crisis broke out, big investors turned to Madoff to return their investments prematurely.

However, Bernie had nothing to pay. The investigation established that, since 1995, Madoff Investments Securities had not conducted any investment activities and paid money only when attracting new clients.

Madoff pleaded guilty to 11 counts, including fraud and money laundering. On June 29, 2009, Bernie was sentenced to 150 years in prison. The total damage caused by Bernie Madoff's ponzi scheme was $64,8 billion, of which only $18 billion was reimbursed to investors. Bernie recently died of natural causes on April 14, 2021 while in prison.

Allen Stanford Ponzi Scheme

Allen Stanford Ponzi Scheme

Texas financier Allen Stanford became the creator of another well-known Ponzi scheme in the United States and managed to make a fortune of $2,2 billion from the plot. Stanford managed to defraud over 30.000 investors from around the world.

In 1993, the Stanford Financial Group was established, which positioned itself as an investment fund. Seven years earlier, in 1986, Allen Stanford had founded Stanford International Bank, which had earned a good reputation.

The scheme was classic. Stanford and its employees contacted clients offering the services of their investment firm. All payments to your customers were made on time.

Stanford became so famous that the official publication World Finance in 2008 awarded it the title of “Person of the Year”. After that, the company existed for less than a year.

In 2008, Stanford Financial Group's reputation was hit by two financiers who pulled out of the fund. They filed lawsuits against the company, noting that the organization was involved in fraudulent activities.

In the midst of Bernie Madoff's then collapsing scheme, the Allen Stanford story caused quite a stir and the Stanford Financial Group released a statement that had nothing to do with such activities.

However, in February 2009, the United States Securities and Exchange Commission (SEC) began an audit of the Stanford company, after which charges were brought against Stanford for fraud and violations of United States financial laws.

In 2012, Allen Stanford was sentenced to 110 years in prison. At the time of the Ponzi scheme collapse, the company managed assets worth $50 billion. The total value of damages was $9,2 billion.

What are the risks of a Ponzi scheme

Cooperating with a Ponzi scheme carries significant risks. Primary risks involve substantial monetary losses. In the event of a Ponzi scheme collapse, it will be almost impossible to get the money back.

So, before you start working with any company, you need to check whether it is fraudulent or not. It is necessary to pay attention to the following factors:

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Licensed by a reputed regulator. Only a company that has a license for financial activities can be legal. Only the state regulator can issue the document. It is recommended to cooperate with companies that have licenses from reputable regulators such as SEC (US), FCA (UK), CySec (Cyprus), BaFin (Germany), ASIC (Australia), etc.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Transparent income generation scheme. A broker or investment platform should provide an opportunity for investors to track managers' actions and follow their decisions. The company must provide detailed information on how profitability will be provided.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

No questionable provisions in internal documents. Before starting cooperation, carefully review the User Agreement. For example, a broker or an investment platform cannot declare its permission to block an account, cancel orders or prohibit the withdrawal of funds “at its own discretion” and “without explanation”.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.

Beware of “unsolicited calls”. Reputable brokers and investment firms do not use “aggressive marketing”. If they call you and offer to invest funds on super favorable terms, don't be too quick to agree. Ask questions about permits, income-generating ploys, and demand as much information as possible.

Only your own vigilance can protect you from possible loss of money and cooperation with the Ponzi scheme.

 

Is the Ponzi scheme a scam?

In theory, companies with a Ponzi scheme can be legal. For example, the organizations we reviewed above paid customers their profits honestly. Some companies may officially operate using this scheme — they receive licenses, pay revenues and pay taxes, etc.

However, in most cases, the Ponzi scheme is used by fraudsters to illegally obtain funds. The goal of scammers is to raise as much money as possible and liquidate the company.

It is not uncommon for websites to post false information that can be easily verified. For example, if the scammers claim that the company has been operating for 15 years, but there is not a single review on the network, you should be very careful with their promises. So this is a new company. And if you provide false information, you are a scammer.

Can I make a profit by joining a Ponzi scheme?

If you have any reason to believe that this is a Ponzi scheme, you should never cooperate with this company. Yes, these organizations can indeed generate profits for customers, at least at the beginning of the maneuver.

However, there is no guarantee that scammers will allow you to withdraw your money. Often, attackers persuade investors to reinvest funds and, in case of refusal, they “buy time”, claiming that delays are related to “banking problems”, “technical reasons”, etc.

Also, it is important to understand that profits in the Ponzi scheme are generated by new members. As soon as the influx of investments ends, the company will collapse.

It is impossible to predict exactly when the collapse will occur. Therefore, the risks of losing money are much greater than the potential profit.

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The Ponzi scheme is a popular scam in the financial markets. Attackers often use it to generate short-term profits from investors who are willing to believe a fake project.

The Ponzi scheme can work in cases where the scammer has good persuasion skills, so aggressive marketing is a feature of this type of scheme.

To protect yourself from the Ponzi scheme, it is recommended to ask questions. There must be a lot of questions for the manager who may be able to contact you. Ask absolutely anything that interests him and pay attention to his reaction.

If he can't answer how the company's profit will increase, how the managers work, if the company's portfolio is available for you to review, etc.

You must get a clear and specific answer to all questions. In addition, it is important to check the licensing of such an organization, because if there is no authorization for financial activities, the company is operating illegally. Always cooperate only with trusted and trusted organizations.

A Ponzi scheme can be defined as a fraudulent scheme in which scammers lure investors and pay them a relatively small profit from new investors, just before the criminals make off with the money.Ponzi Scheme FAQ

 

I saw a lot of good reviews on the broker's website, but it's not very clear.
Do not. The broker may have removed negative comments from their site. Opinions can only be viewed on platforms not directly related to brokers.
I am convinced that the investment firm has been operating for a long time. How can I check?
Yes, very easily. Ask what year the company was founded, then check the license date and reviews. If there are no reviews or if there are few, the company was created very recently.
Brokerage representatives say they are licensed in Belize, but it is offshore. Should I believe them?
Belize is truly an offshore classic, so this broker should be treated with caution. Check for a license from a reputable regulator in addition to the Belize license. Check the comments. Check other company documents.
Can I get a refund in case of fraud?
In theory it is possible, in practice the chances of this are very low. Scammers do not disclose their names and companies are often registered abroad and, after the Ponzi scheme collapses, are quickly liquidated. It's hard to find them. Therefore, it is better to work with trusted brokers.
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