Ponzi Scheme

A Ponzi scheme is a type of investment scam 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, ran by Bernie Madoff, operated for over 30 years and cost investors over $30 billion when it collapsed in 2008.

Identifying a Ponzi scheme can be extremely difficult. Worse, once identified, it may be too late for investors to get their money out. Our securities lawyers may be able to recover your losses. Contact us today to learn more.

Victim of a Ponzi Scheme? Speak With a Lawyer

You may be eligible for monetary recovery. Contact us for a free and confidential consultation.


How Does a Ponzi Scheme Work?

Ponzi schemes are generally operated by a central person who uses the investments from new investors to pay off the returns for the older ones. Since many of the older investors often do receive high returns, the operation seems profitable and, therefore, legitimate. However, there is typically no actual profit being made in these schemes. The person behind the scheme is usually pocketing the extra money and continually expanding the operation.

For this reason, Ponzi schemes are extremely risky and unsustainable. When Ponzi schemes inevitably collapse, investors often lose large amounts of money. If you believe you are a victim of a Ponzi scheme, and have lost part or all of your investment as a result, we encourage you to speak with an experienced securities attorney immediately. You may be able to recover your losses.

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. Typical elements of a Ponzi scheme include:

  • 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.

If you made an investment with any of these characteristics, you may be the victim of a Ponzi scheme. Speak with an attorney immediately to avoid losing your investment.

While similar, Ponzi schemes are actually different from Pyramid schemes. Visit our Ponzi Scheme vs. Pyramid Scheme page to learn more.

Ponzi Scheme Red Flags

While Ponzi schemes are often hard to identity, there are a few warning signs that investors can look for when considering a new investment. According to Investor.gov, these red flags include:

  • A promise of high returns with no risk: Investments that promise high returns typically come with a great deal of risk. If the investment opportunity claims to provide little to no risk, investors should proceed with caution.
  • Extremely consistent returns: Returns on investments can often fluctuate with the market. If an investment continues to pay returns even as the market is down, this may be a sign of a Ponzi scheme.
  • Unregistered investments: Putting your money in investments that are registered will allow you to see information about the company’s finances, products, and services. Ponzi schemes typically involve unregistered investments, allowing the scam to hide these details.
  • Complicated investment strategies: Ponzi schemes are often extremely complicated, and it may be hard to get full information about these investments. Investors should beware of putting their money in investments that they don’t have detailed information about.
  • Account statement errors: Any errors or issues with paperwork may be a sign that your money is not being invested in the ways initially promised.
  • Unlicensed advisors or firms: If the person selling you the investment is unlicensed or unregistered, this may be the sign of an investment scam. FINRA’s brokercheck tool can be utilized to check the registration of an advisor before investing.
  • Difficulty receiving payments: If you have difficulty receiving payments or cashing out of your investment, this may mean that your investment is not as stable as promised.

We encourage you to contact our firm immediately if you experience any of these red flags. All our consultations are free and confidential.

Ponzi Schemes Using Bitcoin & Other Virtual Currencies: The Latest Ponzi Schemes

The Securities and Exchange Commission (SEC) has issued an alert for investors to be aware of any scams involving virtual currency. According to the SEC’s Investor Alert:

We are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions. The fraud may also involve an unregistered offering or trading platform. These schemes often promise high returns for getting in on the ground floor of a growing Internet phenomenon.

The SEC has recently been involved in a case regarding a Ponzi scheme advertising a Bitcoin investment in an online Bitcoin forum. The operator of this scheme allegedly promised investors up to 7% interest per week, generated from Bitcoin arbitrage activities. The case, SEC v. Shavers, entered into final judgement in 2014, and the operator of the scheme was ordered to pay over $40 million in discouragement and penalties.

The Largest Ponzi Scheme Class Action Lawsuits

Our securities fraud lawyers have successfully represented consumers from all across the country who had fallen victim to a Ponzi scheme or other securities fraud. Two of our most prominent cases include:

Medical Capital Litigation

Gibbs Law Group litigated a Ponzi scheme class action lawsuits on behalf of investors who suffered an investment scam by four different entities. The lawsuit alleged that Securities America and Ameriprise Financial misleadingly marketed Medical Capital Notes to their clients as reliable investments. In reality, however, these investments were part of a Ponzi scheme. Our investment scam team served as Co-lead Council on this case and secured a settlement of $80 million on behalf of investors.

Towers Financial Corporation Noteholders Litigation

Our firm served as liaison counsel in this class action brought against promoters and professionals who falsely marketed Towers Financial Corporation’s promissory notes. The Securities and Exchange Commission described this failed investment scam as the “largest Ponzi scheme in U.S. history.”

Our securities lawyers have also filed a class action lawsuit against GPB Capital, which was accused by a former business partner of being a Ponzi scheme.

Eileen Epstein Carney

Eileen works closely with investors in securities cases and has over a decade of experience in the legal world. She received her law degree from American University in 2005.

Dave Stein

David’s advocacy has generated major recoveries for consumers impacted by financial fraud. He was named to the Top 40 Under 40 by Daily Journal and a “Rising Star in Class Actions” by Law360.

Amanda Karl

Amanda is spearheading a securities lawsuit against NantHealth concerning fraudulent statements to investors about the success of its key product.

Our Financial Fraud Experience

Gibbs Law Group’s financial fraud and securities lawyers have more than two decades of experience prosecuting fraud. Our attorneys have successfully litigated against some of the largest companies in the United States, and we have recovered more than a billion dollars on our clients’ behalf.

We have fought some of the most complex cases brought under federal and state laws nationwide, and our attorneys have been recognized with numerous awards and honors for their accomplishments, including Top 100 Super Lawyers in Northern California, Top Plaintiff Lawyers in California, The Best Lawyers in America, and rated AV Preeminent (among the highest class of attorneys for professional ethics and legal skills).
titan of plaintiffs bar award
best law firm ranking
chambers USA leading firms award
daily journal top plaintiff lawyers award