How do you protect yourself from the Ponzi scheme?

ponzi scheme

The previous few decades have seen a variety of fraudulent financial schemes emerge due to unstable economic conditions. The Ponzi scheme is one such fraud plan. Charles Ponzi, who in 1920 employed a method known as the “confidence trick,” is the inspiration behind the Ponzi scheme. He promised investors their money would quadruple in 90 days after purchasing foreign postal coupons. 

The initial appearance of the investment was optimistic because he had given all of the early investors their promised profits. Then, however, Charles’ Ponzi scheme attracted investors, which caused his debts to expand rapidly.

His obligations increased significantly due to promises of doubling everyone’s income. Now he owed everyone much more. However, Charles Ponzi didn’t care as long as every investor wasn’t demanding their money at once. But when it was revealed that he had filed for bankruptcy, all of his investors scrambled to withdraw all of their money at once out of fear. As a result of his scheme, Ponzi received investments totaling more than $200 million. However, while returning the money to the investors, he fell short on 120 million dollars. It was a crucial lesson for the investors and everyone else who learnt why one shouldn’t follow the herd mindlessly. But the century-old program still has a negative impact on people who aren’t investing cautiously.

Is a Ponzi scheme unlawful?

Charles Ponzi ran a scam, but it wasn’t regarded as unlawful since it covered arbitrage. However, the Ponzi schemes operated by other con artists are different from it. They run a full-blown illicit practice. The investments are typically not SEC(the Securities and Exchange Commission)-registered in most cases.

The money collected isn’t even suitable to be called an investment. Additionally, some of this collected capital is divided up among the previous investors. They lack paperwork and use unlicensed sellers. The end goal is to defraud the investors while the owners line their own pockets.

How does the Ponzi scheme work?

Every new investment contributes money to the Ponzi scheme, keeping it going. The depositors believe they have invested their money in a legitimate company.

Instead, the scheme’s mastermind presents it as a well-planned service sale or as a series of products. They offer complex and challenging business models and strategies. It strengthens the appeal for investing. Finally, the scheme operators begin pressurising the target audience after dismissing any questions that may arise during this procedure.

The structure of the investment scam involves repaying the previous financiers with the aid of fresh capital. They have a simple formula, they embezzle money from Harry to pay back Louis.

Their plan finally fails when they cannot find new investors and run out of money. But, on the other hand, the con artists shut down their operations and leave before the old investors start asking for their withdrawals.

Common Red flags of the Ponzi scheme:

Ponzi schemes frequently have similar traits. Here are some of the warning sings:

A high rate of return with little or no risk:

Every investment carries some risk level, and assets that have a higher chance of paying off generally have a more significant threat. Therefore, be incredibly wary of any ” guaranteed investment offer.”

Returns that are too regular:

Over time, investments can have ups and downs. Any asset that consistently produces profits, independent of general market conditions, should be viewed cautiously.

Unreported investments:

Investments not registered with the SEC or state regulators are part of ponzi scams. Registration is crucial to give investors information about the company’s management, goods, services, and finances.

Unauthorized sellers:

Investment professionals and firms must be licensed or registered under federal and state securities regulations. The majority of Ponzi schemes involve unauthorized parties or unregistered businesses.

Secretive, sophisticated methods:

If you can’t comprehend an investment or can’t receive all the facts you need, stay away from it.

Paperwork-related problems:

Errors in account statements could indicate that money is not being invested as promised.

Getting funds is difficult:

Be wary if you don’t get paid or have trouble withdrawing money. Promoters of Ponzi schemes occasionally attempt to deter participants from withdrawing their money by promising even greater rewards for sticking around.

How to protect yourself against a Ponzi scheme?

Ponzi schemes expertly pose as prospective businesses or investment enterprises. Therefore, you must be aware of several factors you can point out in anticipating these schemes and increasing your guard.

Here are some procedures to secure you and your assets against a Ponzi scheme.

  • Avoid companies that advertise high and consistent returns that don’t seem attainable.
  • If previous investors complain about not getting paid, don’t consider investing with them.
  • Be wary of typos in a contract or other legal documents.
  • Exercise due diligence when investing; research the platform, consider its earnings and rules, and so on.
  • Your investment strategy should be confirmed and verified by a financial advisor. Additionally, Inspect your hired expert to be sure they offer an impartial third-party service and are not associated with the broker.
  • Avoid making rash judgments if you are managing with an aggressive or pushy sales team.
  • Even if they request it with a justifiable explanation, never sign your cheques in a different name than the business you are working with.
  • Keep an eye out for investor requirements. It is preferable to avoid your relationship with accredited financiers if there are no minimum requirements or the provisions are illogical.

By following these precautions, one can protect themselves from these schemes.


Charles Ponzi made an investment offer in 1920 that their money would treble in 90 days. His investors rushed to withdraw all their money out of panic when he declared bankruptcy. The century-old scheme nevertheless negatively impacts people who aren’t careful about their trade. Most Ponzi schemes involve uninvited guests or unlisted companies. In addition, Ponzi frauds frequently include investments that have not been registered with the SEC or local regulators.

Account statement mistakes could indicate that investments are not being made as promised. So stay away from businesses that promise large and reliable profits that appear unattainable.

By Olivia Bradley

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