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Financial Fraud Law

10 Tips To Avoid Ponzi Schemes

Ponzi schemes are quite widespread, and investors should be ready to protect themselves, says Sareena Malik Sawhney, MBA, CFE, CFFA, a forensic accountant and authority on financial fraud who serves as a director in the Litigation and Corporate Financial Advisory Services Group of New York accounting firm Marks Paneth & Shron LLP. 

"Ponzi schemes typically start in an economic boom, then are exposed when the economy stalls and investors demand return of their capital -- which of course no longer exists because it has been used to pay fraudulent 'dividends' and 'interest' to new investors," Sawhney says.
 
According to Sawhney, investors need to be wary, but they can protect themselves by doing their own due diligence. In particular, there are 10 warning signs of Ponzi schemes that investors need to watch out for:
 
1. High returns with little risk - "Be wary of investments with high yields that have little or no risk. There is no such thing as a guaranteed return," Sawhney says.
2. Investments with too-consistent returns - "Be highly suspect of investments that generate consistently positive returns regardless of economic conditions. No investment is immune to economic effects."
3. Investments you don't understand - "Stay away from complicated investments that you don't understand. Complex, obscure strategies can be a cover for fraud."
4. Not getting enough information - "Be wary if you are consistently requesting information about an investment and the investment representative is not being responsive or is avoiding you."
5. Inaccurate or questionable investment account statements - "Miscalculations on statements may be a sign that you need to start asking questions. They may also indicate that your money may not be used for its intended purpose. Of course, finding miscalculations requires that you review your statements in detail -- something you should do with every investment account, but it's a step that too many investors skip."
6. Difficulty receiving payments - "Be extremely concerned if you are not receiving payments on your investment, or you have problems cashing out your investment."
7. Funds that are not deposited in a separate custodian account - "If your funds are being deposited directly with your investment advisor, that means that he or she has access to your funds. And that in turn means that your advisor has the opportunity to commit fraud."
8. Statements that are sent directly from your investment advisor - "In any legitimate investment, you would receive monthly statements from a third-party custodial institution rather than directly from your investment advisor. That's because these functions should remain separate. If your advisor sends statements directly, there is cause for alarm."
9. You're told that you are now part of an exclusive investment club - "If someone approaches you and tells you that you can be part of an exclusive investment -- be suspicious. That's a classic fraud approach -- the idea that you're getting privileged information or access. Skepticism is in order."
10. The advisor is recommended by word of mouth - "Friends and acquaintances can provide legitimate advice. But often, enthusiastic friends serve as unwitting recruiters for Ponzi schemes. The person recommending the investment may be getting high returns, but may not have done any due diligence. You need to do your own."
 
"Ponzi schemes are widespread -- in spite of high-profile convictions and prosecutions, the danger is still out there," Sawhney says. "Investors need to protect themselves by maintaining a healthy skepticism, and subjecting every investment opportunity to due diligence. It's important to remember the tried-and-true warning that investments that seem to be too good to be true usually are."

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