In this article I explain what a Ponzi Scheme is and how they effect people so you can protect yourself from being scammed.
What They Are
According the official FBI website:
“Ponzi schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”
Any kind of investment that is paying investors based on revenue gained through new investors as oppose to through genuine investments in the market is a Ponzi scheme.
This is unsustainable because there is a limit to how many people can sign up for such a scheme and when the number of new members coming in dwindles or too many want to cash out their investments at once, the scheme faces collapse.
At this point the schemer takes the money and runs or ends up being brought up on charges by the relevant authorities.
One historic case of a Ponzi scheme is that of Bernard Madoff where he ripped off around 4,800 investors between the early 90’s until his arrest in 2008. The scheme was said to have caused over $60 billion in losses to investors and ended with Madoff’s 150 year jail sentence and the multiple suicides of others involved or affected.
Ponzi’s are similar to a pyramid scheme except for the fact that no recruiting is needed and a Ponzi is a ‘passive investment’ as oppose to a work at home opportunity.
Warning Signs Of a Ponzi Scheme
The following questions will help you to identify a Ponzi scheme:
- Is it abundantly clear (and provable) how your funds are being invested?
- Are the details sketchy on the operation as a whole?
- Are there low daily withdrawal limits?
- Is it difficult or even impossible to identify the people behind the operation?
- Are the ROI’s being presented higher than usual?
It’s not always easy to identify these schemes but the above are generally a good way to identify them and protect yourself before getting knee deep in such a scam.
They often give people vague information and hide important details such as their identity to avoid prosecution once the scam manifests itself.
They often significantly cap the amount of money that can be withdrawn at any one time to allow the scheme to continue for as long as possible, however failure to have this cap in place does not remove it from being a Ponzi- it may just mean those behind it have a bigger bank roll. The longer the scheme runs, the more money the con artist behind it makes.
What Is a High Yield Investment Program (HYIP)?
A HYIP is a fraudulent investment scheme promising higher than average returns to investors. It is a type of Ponzi scheme where investors are promised higher than average returns.
According to the Investor.gov:
“The Internet is awash in so-called “high-yield investment programs” or “HYIPs.” These are unregistered investments typically run by unlicensed individuals – and they are often frauds. The hallmark of an HYIP scam is the promise of incredible returns at little or no risk to the investor. A HYIP website might promise annual (or even monthly, weekly, or daily!) returns of 30 or 40 percent – or more.”
Like Ponzi’s, ROI’s are paid out based on new investment as oppose to legitimate sources of revenue. These schemes are run by unlicensed individuals who conceal their true identity, unfortunately the internet is full of these.
A Well Known Example
One classic example of a Ponzi/ pyramid scheme is that of Zeek Rewards, a company that has been shut down by the SEC.
There were many elements to this pyramid/ Ponzi scheme but one in particular was a share in the ‘Daily Profit Pool’ which was supposedly made up of 50% of company’s retail profits. This share was paid out to all qualifying affiliates according to how much they had invested in the scheme. The reality was that around 99% of the companies revenue was coming from affiliates themselves as oppose to genuine customers outside of the affiliate program.
The company was fiercely defended by many affiliates as is often the case with these schemes, it took time and SEC intervention to finally shine the light on this scheme. In the end those same affiliates along with those just trying to make some extra money, suffered losses into the millions of dollars. A very unfortunate and sad state of affairs indeed.
The Bottom Line
Despite some of the claims these con artists make or how well defended they are by unknowing (or knowing) affiliates, it is worthwhile doing your homework if you plan on investing in something with some of the red flags I’ve mentioned.
Ponzi schemes always have and always will collapse given the very construct of the business model and are never worth joining. The internet is a breeding ground for these kinds of schemes given it’s anonymous nature, how easy it is to present a legitimate looking website and how easy it is to get biased (and totally fake) positive reviews and testimonials.
Many of these rise up and are shut down every month and will continue to do so. The only question is whether or not you personally fall victim to one of these schemes.