What’s a Ponzi scheme?

A Ponzi scheme is basically investment fraud that involves investors paying money into an investment and then receiving a return. The return is not honest; instead, the continued investments from other investors are used to pay some investors a return while others are told they lost money in the market. The Ponzi scheme claims that there are high returns with low risks, making it clear that the risks could result in losses in some cases.

If you're accused of running a Ponzi scheme, it's important that you're able to prove that you aren't. Have the right paperwork showing where investments went and how they accrued or were lost. You should always have this information ready and accessible.

The way a Ponzi scheme works is by showing new investors the payouts that were made to first-generation investors. Those funds, of course, came from other investors hoping to get the same kind of returns. Ponzi schemes only collapse when there is a lack of new investors or when investors in the scheme decide to cash out all at once. The goal of the scheme is to prevent these people from ever cashing out their earnings. If you're told that you just need to bring in a new investor to make big earnings, you might want to consider what's happening in your company. Are you earning too much too often? High returns on investments aren't common in real stock markets.

Some red flags signaling a Ponzi scheme include overly consistent returns, unlicensed sellers, problems accessing paperwork, problems receiving payments and unregistered investments. If you've been caught up in one unknowingly, you need to defend yourself quickly.

Source: U.S. Securities and Exchange Commission, "Ponzi Schemes," accessed June 17, 2015

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