A Ponzi scheme is a type of securities fraud that uses money from new investors to pay off earlier investors, while promising high rates of return. Ponzi schemes rely on a constant stream of new investors to maintain returns, and tend to collapse when new investors are not available, or when existing investors ask to cash out. One of the most famous Ponzi schemes, operated by Bernie Madoff, operated for over 30 years and cost investors over $30 billion when it collapsed in 2008.
Elements of a Ponzi Scheme
Ponzi schemes typically follow a simple pattern that can be surprisingly effective. Many Ponzi schemes are able to progress from a few initial investors to hundreds or thousands of investors contributing millions of dollars in a relatively short time frame.
- Promise High Returns
In a Ponzi scheme, investors are often promised higher than usual rates of return, but not so high as to make it unbelievable. Promises of high returns are often combined with promises of consistent returns.
- Claim Access to Inside Information
The operator of the scheme explains how the high returns are achieved, often citing access to information or opportunities not available to the public. This explanation makes the scheme appear legitimate.
- Pay Initial Investors
Initial investors are paid off over the short term, lending additional credibility to the operator of the scheme.
- Spread the Word
These initial investors spread the word about their new investment, drawing other investors into the scheme.
Ponzi Scheme Class Action Lawsuits
Our securities fraud lawyers have had successfully represented consumers from all across the country who had fallen victim to a Ponzi scheme or other securities fraud. Currently, we are litigating Ponzi scheme class action lawsuits alleging Securities America and Ameriprise Financial sold fraudulent securities offered by Provident and Medical Capital. Read more about these cases below:
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