Ponzi Schemes

CONSUMER ALERT

BILL SCHUETTE
ATTORNEY GENERAL

The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern.  Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General. 

PONZI SCHEMES

The largest recent example of a Ponzi scheme was that operated by Bernard Madoff, who scammed investors out of billions of dollars.  Even though many consumers may think Ponzi schemes are rare and easy to spot, in reality, Ponzi schemes are common, and can fool even very experienced investors into investing large sums of money.  This Consumer Alert will provide you with some helpful tips on how to avoid falling for a Ponzi scheme, what to do if you become a victim and where to find additional information. 

A Ponzi scheme?--What's that?

A Ponzi scheme is named after Charles Ponzi, who is believed to be the inventor of this type of scam.  In the early 20^th century, Mr. Ponzi convinced investors that they would get a 40 to 50% on their investment in International Postal Reply Coupons (IPRCs) within 90 days.  Early investors received payouts as promised because Mr. Ponzi was using funds from later investors to give the promised payouts to earlier investors.  The scam continued to grow, as more and more investors, lured by stories of huge payouts, invested their money in IPRCs.  Eventually, the scheme collapsed, but not before investors paid Mr. Ponzi several million dollars - which was an astronomical sum, especially in the early 20^th century. 

Present day Ponzi schemes operate in essentially the same way as their namesake. Early investors, lured by promises of huge payouts in a short amount of time, invest large sums of money (sometimes even millions of dollars) in whatever investment the perpetrator is selling at a given time.  The perpetrator may be offering investments in real estate, natural resources (i.e., oil or natural gas reserves), or any other type of investment a creative perpetrator can come up with. 

The hallmark of a "successful" Ponzi scheme is that early investors will receive their payouts as promised.  Early investors spread their tales of success to unwittingly entice new investors into the scam.  Ponzi schemes may continue to grow for several months, or possibly several years, before people eventually catch on, and the scheme collapses. 

If experienced investors fall for ponzi schemes, how can I spot and avoid them?

1. If it sounds too good to be true, it probably is.  Perpetrators of Ponzi schemes usually guarantee high returns in a short amount of time.  Legitimate investments always involve risk, especially in the volatile economic environment that we are currently experiencing.  If you are promised a guaranteed return on your investment, or if you are promised a huge return on your investment for very little risk, beware! 

2. Watch out for promoters who do not provide you with clear explanations of how the investment works, or who refuse to provide you with detailed information in writing.  If the person selling the investment refuses to explain how the investment works because it is "too complicated" or "not something you need to worry about", this is a warning sign of potential trouble.  The same is true if a seller refuses to provide you with written information on the investment, and how it works.  It is very important that you understand your investments and how they work. 

3. Do your homework before you invest.  Most Ponzi schemes are set up as investment contracts, which are considered securities.  All securities sold in the State of Michigan must be registered, and for the most part, anyone selling securities is required to be licensed.  To check to see if the seller is licensed, visit the Department of Licensing and Regulatory Affairs (LARA) at http://www.michigan.gov/lara/0,4601,7-154-10555_13047_32915---,00.html, or call LARA Securities Division at 517-241-6345. 

4. Sleep on it.  Don't allow yourself to be rushed into investing your money.  If a promoter is trying to rush you into investing with promises of huge returns "but only if you act now," walk away. 

I THINK I'VE INVESTED IN A PONZI SCHEME.  NOW WHAT?

If you've been approached to invest in what appears to be a Ponzi scheme, or if you have invested in what you believe to be a Ponzi scheme, file a complaint with LARA's Bureau of Commercial Services.  For more information on how to file a securities complaint with LARA, and for a link to the complaint form, please visit http://www.michigan.gov/difs/0,5269,7-303-12902_12907---,00.html or call 1-877-999-6442. 

FOR MORE INFORMATION ON INVESTMENT SCAMS

If you would like additional information on how to spot investment scams, you may wish to visit the following websites:

·         The National Association of Securities Administrators: http://www.nasaa.org/investor-education/.  The National Association of Securities Administrators also provides a helpful podcast on how to spot Ponzi schemes at http://www.nasaa.org/newsroom/nasaa-podcast-archive/.

·         The Federal Trade Commission: http://www.ftc.gov/bcp/menus/consumer/invest/schemes.shtm

·         The Securities and Exchange Commission: http://www.sec.gov/investor.shtml

FOR GENERAL CONSUMER COMPLAINTS, CONTACT THE ATTORNEY GENERAL'S CONSUMER PROTECTION DIVISION

If you have a general consumer complaint, please file a complaint with the Attorney General's Consumer Protection Division at: 

Consumer Protection Division
P.O. Box 30213
Lansing, MI 48909

517-373-1140
Fax: 517-241-3771

Toll free: 877-765-8388

www.michigan.gov/ag (online complaint form)