High-profile con artists didn’t disappear when financial villain Bernie Madoff was thrown in the slammer in perpetuity for duping intelligent people out of billions of dollars. Just last month, the Securities & Exchange Commission cracked down on two separate Ponzi schemes that together swindled more than 1 million investors across the U.S.:
- Online penny-auction sites ZeekRewards.com and Zeekler.com were shut down after the SEC declared the operation a $600 million Ponzi scheme.
- Two days after Zeekler’s demise, businessman Ricardo Bonilla Rojas and his firm, Shadai Yire, were charged with operating a Ponzi scheme aimed at evangelical Christians and factory workers.
While many think “I’m too smart to fall for shenanigans like that,” or “That couldn’t happen to me, I’m careful,” Ponzi schemes are what Lori Schock, director of investor education and advocacy for the SEC, refers to as “equal opportunity crimes.”
“Investment fraud transcends all socioeconomic backgrounds,” Schock said during an interview with InvestorPlace. “Even highly sophisticated, investment-savvy individuals can be taken by Ponzi schemes and other investment crimes, because the fraudsters usually come across as credible.”
Even though financial cons are easy to fall for, statistics show that 90% of investment fraud could have been avoided, according to Schock, if the victims would have done two things: ask and check.
Schock uses a familiar analogy to make her point.
“If a police officer pulls you over for speeding, he or she is going to ask you for your driver’s license and vehicle registration,” she said. “Then the officer will take steps to verify the information you provided. Investors should follow this example when being asked to do anything with their hard-earned money.”
The two questions investors are encouraged to ask and investigate first are:
- Is the seller licensed?
- Is the investment registered?
The majority of legitimate investment opportunities are licensed and then registered with the SEC, Schock said.
Federal and state securities laws require investment firms and professionals to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered companies. Registration is important, because it provides consumers with access to vital company information such as product offering, financial statements and management activities.
In addition to the lack of a proper license and registration, the following Ponzi scheme characteristics are red flags, notes the SEC:
- High investment returns with little or no risk: Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be extremely suspicious of any “guaranteed” investment opportunity.
- Overly consistent returns: Investment returns tend to go up and down over time, especially instruments seeking to always beat the market. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
- Secretive and/or complex strategies: Avoid investments you don’t understand or for which you can’t get complete information.
- Issues with paperwork: Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds aren’t being invested as promised.
- Difficulty receiving payments: Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.
The SEC has set up a new microsite — investor.gov — to help consumers conduct their due diligence to investigate an investment opportunity. Anyone suspecting that an investment opportunity is actually a Ponzi scheme should contact the SEC at (800) 732-0330 or online.