Before you invest in Forex trading, know what to expect. Don’t fall victim to a Ponzi scheme. Despite high-profile arrests over the past decade, Ponzi schemes still exist. Learn the red flags in the following article.
Forex is not a Ponzi scheme. It is a legitimate exchange market with international regulators. However, investment opportunities like Forex can be used to commit crimes. Scammers use money from new investors for their own benefit and to pay earlier investors.
Read our related article for more in-depth information about Forex trading, how it works, where it’s legal, and related scams.
What is a Ponzi Scheme?
The best definition of a Ponzi scheme is described as a situation in which people invest their money. They believe they will gain a profit from interest, dividends, and trading in a market such as Forex. The scammer then uses most of the money for themselves. When they recruit new investors, they use their money to satisfy earlier investors.
These payments are proof of success in their investment. This is how the confidence element is established in a Ponzi scheme. This fake success helps to lure more investors and the cycle continues.
One of the key elements of a Ponzi scheme is the scammer does not actually invest some or all of the money. There may be some investment in the market to avoid suspicion. However, the person operating the scheme spends most of the money on their personal lifestyle.
In simple terms, scammers use Ponzi schemes to steal investors’ money and lie about their success to find more victims and keep the scam working.
A Ponzi scheme works because people see the scheme as a successful investment opportunity. They also want to financially benefit. Investors may wish to save enough for retirement. Or they are in financial hardship or simply want more spending money.
Jump to: Ponzi Scheme Red Flags
Jump to: Ponzi Scheme vs Pyramid Scheme
Other Names for Ponzi Scheme
A synonym for a Ponzi scheme is to ‘rob Peter to pay Paul’. You can also refer to it as a Ponzi game. This describes the satisfying of one debt by taking on another.
It sometimes involves credit cards. This is a method people use to shuffle debt around. Sometimes it is an attempt to avoid interest charges. They do not want to owe a single lender for a long period of time.
Because the lender does not know the source of this repayment, it mimics a Ponzi scheme. Because in these schemes money from new investors is like a new debt. It is a way to pay earlier investors who are like the original loaner.
In essence, Ponzi schemes do not make money. They are not making any financial progress. Instead, they are just rotating the source of their debt.
Ponzi Scheme Characteristics
|Consistent Above-Average Returns|
|Source of Success is Secret|
|Less-Informed Investors Targeted|
|Lack of Proper Licensing|
Consistent above-average returns
The scammer uses these returns to entice current Forex investors to stay and to encourage the recruitment of new investors. The new recruits will see these apparent successes and will want to participate themselves.
This stands out from other investments because these are much more consistent. Most investments go through periods of ups and downs as well as staying stagnant.
But that activity may not be enough to keep a Ponzi scheme going. This scheme depends on the ability to find investors. This is because the scammer spends their capital investment on other things instead of for actual investments.
Source of success is secret
It’s not entirely uncommon in some industries to have some level of secrecy. Another name for this is proprietary information.
In more simple terms it is the secret sauce recipe you would not want a competitor to have access to. By keeping it secret, you maintain an advantage.
However, there are certain principles in investing that are universal. It is the degree to which this secrecy exists that makes it stand out. The inability to get information about the types of investments is suspicious. How they make their decision on each trade can be more secretive.
Target less informed investors
Many Ponzi schemes involve hedge funds. These types of investments are for people who can afford larger initial investments than most other amateur investors.
However, the amount they invest is not proportionate to their experience. It is simply a reflection of their current level of resources. In most cases, they are successful in other industries that also require their attention.
Because they cannot devote a substantial amount of time to researching these investments, it can be harder for them to identify the red flags of a Ponzi scheme.
Scammers do this by diversifying their investments. Most times the organizers of Ponzi schemes spend investors’ money on their lavish lifestyle as opposed to actually investing.
But in order to create the necessary paper trail to make their scheme believable, some investments can be made. When they are, they often use nonsecure holdings and other entities that are less strictly regulated.
Operations do not have the proper licensing
Most of the biggest Ponzi schemes involved brokers who were originally legitimate. So they may have the proper licensing. However, over time their greed or financial difficulty led to the beginning of the schemes.
But lesser-known organizers often start without the proper credentials. This is because they are less interested in the industry. Their involvement begins with the original intent of making money through these schemes.
Ponzi Scheme History
The origin of the Ponzi Scheme name comes from Carlo Ponzi. He was an Italian immigrant known in the United States as Charles Ponzi. He was responsible for the first Ponzi Scheme.
Clearly, modern-day Ponzi schemes are named after him. His last name is used to describe this kind of activity. He was active in the 1920s when he created a scheme involving coupons. They were postal stamps used to send reply mail to other countries.
It is widely established that his scheme was not the first scheme of this nature. There were people who performed similar activities in the late 1800s. Despite not being the inventor of these schemes, his scheme was so popular he was widely considered the founder.
Is Forex a Ponzi Scheme?
Forex is not a Ponzi scheme. It is a legitimate market similar to the stock market. The Securites and Exchange Commission (SEC) enforces regulations in the United States.
Interested investors can use legitimate brokers to invest in this market. It involves buying and selling foreign currencies. That is how it gets his name as the foreign exchange.
Forex does provide an opportunity for scammers to conduct Ponzi schemes. Because it is an investment opportunity, there is a potential for a large amount of money to exchange hands. Scammers see this opportunity as a way to steal from unsuspecting victims.
They will pose as a broker and accept money from an investor. They will promise large profits as a result of investing this money in forex trading.
However, the Ponzi scheme does not include any significant investment in Forex. Rather, the scammer uses this money for personal benefit. They also use some of this money to give to earlier investors in this scam.
With this in mind, it is important to differentiate between the real Forex market and Ponzi schemes that use Forex as a means of their scam. The actual market is a real thing. Not only can you make money by using Forex, but it is an important market that facilitates international commerce.
Ponzi Scheme vs Pyramid Scheme
There are two main differences between Ponzi and pyramid schemes. The first has to do with the flow of money traveling in a different direction.
In a Ponzi scheme, think of a circle of investors with the scammer in the middle. All of the money goes into the middle. Occasionally a portion of that money is not consumed by the scammer. It is distributed around the circle.
This is done to keep the scam alive and satisfy earlier investors. It is also a way to entice more investors to come to the circle.
In a pyramid scheme, it may not be a surprise but picture a triangle with the scammer at the top. Investors cascade down the pyramid almost like the branches of a tree. All of the money goes up from the base of the pyramid to the top.
The other difference between these two types of scams is the recruitment efforts. In a Ponzi scheme, the recruitment does not lie with other investors. It is more of marketing from the scammer.
In contrast, a pyramid scheme relies on each investor to recruit more people underneath them. Then these new recruits continue this process. It continues to grow downwards. This is where the term down line refers to.
Ponzi Scheme vs Multi Level Marketing (MLM)
Multi-level marketing, or network marketing, has a similar structure to pyramid schemes. However, there is an actual product that is being bought and sold.
Alternatively, with pyramid schemes, there is either no product or it is not the focus of their endeavors. It is the recruitment and collection of investments from new recruits that earn the most profit.
MLMs also differ from both pyramid schemes and Ponzi schemes because MLMs are legal.
Ponzi Schemes and Hedge Funds
Hedge funds are often confused with Ponzi schemes. This is because they are one way the schemes can be carried out. However, just as Forex is legal and not a scam, hedge funds also serve a legitimate function. They are actual investments managed for people with high initial investments.
Are Ponzi Schemes Illegal?
Ponzi schemes are a crime. What makes a Ponzi scheme a crime is the scammer is not actually investing money. They are lying to the investors and stealing their money. This money is used for the personal benefit of the scammer.
In some jurisdictions, this can be seen as theft by deception or theft by the disposition of funds. That would be the case at the state and local levels.
However, because the schemes involve victims from around the world they are more often prosecuted at the federal level. Also, there are specific rules for trading securities that apply directly to these kinds of situations.
Laws to Prevent Ponzi Schemes
Anyone found running a Ponzi scheme will face criminal charges. The Securities Act of 1933 was the first direct set of laws prohibiting these activities. Before then, such schemes were far less common. Often laws take time to catch up to new trends.
The anti-fraud provisions of the Securities Exchange Act of 1934 soon followed. This further defined the previously established rules that were sometimes vague or open to interpretation.
Finally, the Investment Advisers Act of 1940 focuses on the specific behaviors of brokers and anyone providing trading consultation. This restricts some of the deceptive business practices someone may use to lure a victim into a scam.
Who Prosecutes Ponzi Schemes
Securities fraud is a federal crime. The Securities and Exchange Commission (SEC) investigates and prosecutes cases of Ponzi schemes in the United States. They do not have jurisdiction to pursue cases that occur strictly in other countries.
Each country participating in the foreign exchange market has its own regulating body. This way, each country can set the rule to choose how they interact with the market.
Ponzi Scheme Jail Time
The punishment you can expect someone to face for running a Ponzi scheme varies. The penalty is in the range from between 20 to 150 years in prison. This sentence is based on the length of time the crime occurred, how much money was stolen, and the impact on the victims.
The Biggest Ponzi Scheme
Bernard Madoff, known informally as Bernie Madoff, ran the largest Ponzi Scheme ever. Madoff’s scheme ran in the United States from as early as the 1990s until 2008. The Madoff scandal netted this scammer over 60 billion dollars using a hedge fund. He was sentenced to 150 years for his scam.
Ponzi Scheme List
|Ponzi Scheme||Years Active||Money Stolen||Jail Time|
|Robert Shapiro||2012 – 2017||$1.3 Billion||25 years|
|DC Solar||2011 – 2018||$1 Billion||30 years|
|Zeek Rewards||2010 – 2012||$900 Million||15 years|
|Hoffenberg||1970 – 1993||$475 Million||20 years|
|Jordan Belfort||1989 – 1999||$200 Million||2 years|
|Gregory Altieri||2018 – 2020||$200 Million||20 years|
|Christopher Parris||2012 – 2018||$115 Million||20 years|
|Joseph Forte||1995 – 2009||$34 Million||15 years|
|Jan Lewan||1990 – 2004||$5 Million||6 years|
Famous Ponzi Schemes
Robert Shapiro is first on our list of Ponzi schemes. He was responsible for the Woodbridge Group Ponzi scheme from 2012 to 2017. During that time, he stole $1.3 billion in a real estate investment scam. As a result, he was sentenced to 25 years in prison.
The DC Solar Ponzi scheme occurred between 2011 to 2018. The scammers took victims’ money for an investment in solar energy generators that did not actually exist. $1 billion was stolen in total. The perpetrators faced up to 30 years in prison.
The Zeek Reward Ponzi scheme occurred from 2010 to 2012. The scam involved stealing $900 million dollars. The victims were promised 125% returns for online penny auctions. The Ponzi scheme perpetrators are serving a 15-year jail term as punishment.
The Hoffenberg Ponzi scheme happened from the 1970s to 1993. This debt collection scam resulted in the theft of $475 million. The ring leader faced a 20-year prison sentence. Although Jeffrey Epstein was involved in this Ponzi scheme company, he left before the discovery of the fraud. So he was able to avoid being charged.
Jordan Belfort is another example of a Ponzi scheme scammer. Between 1989 and 1999, he defrauded investors using penny stocks. He was sentenced to 4 years in jail. He later released a book that inspired the movie “The Wolf of Wallstreet”.
From 2018 to 2020, Gregory Altieri defrauded investors in a jewelry wholesale Ponzi scheme. For his theft of $200 million dollars, he faces a 20-year penalty.
The Christopher Parris Ponzi scheme lasted from 2012 to 2018. After being caught stealing $115 million, he faced up to 20 years for the hedge fund scam.
Another hedge fund ran by Joseph Forte was found to be a Ponzi scheme running from 1995 to 2009. His $34 million dollar scam earned him a trip to prison for 15 years.
Finally, Jan Lewan sold shares of his own gift store and stole $5 million dollars. When caught in 2004, this Ponzi scheme resulted in a nearly 6-year jail term. American actor Jack Black plays him in a movie based on his life.
Are these Current Ponzi Schemes?
Ponzi Scheme vs Sou Sou
Sou Sou is described as money-saving and sharing within a group or community. This kind of scheme goes by other names such as a blessing loom, or gifting circle. The basic premise is a bunch of people gives the organizer money. At set intervals, one person is scheduled to receive the money in one lump sum. All members continue to contribute and the payouts rotate around the members.
These Ponzi schemes are often shared on social networking websites such as Facebook and Instagram. They depend on building trust with new recruits by having someone they know to introduce them to the scheme. When new recruits run out, all people awaiting their turn to get paid are out of money.
Sou Sou and blessing looms are Ponzi schemes. This is because the organizers steal most of the money and depend on new recruits for money to keep the scheme running.
Is Bitcoin a Ponzi scheme?
Bitcoin and most mainstream cryptocurrencies are not Ponzi schemes. If you invest with a reputable broker to purchase Bitcoin, you are actually investing in a market.
However, there are cryptocurrency pyramid schemes. These are lesser-known assets scammers claim will be worth millions after some time. In reality, these investments may not even really exist. Think of them the same as most penny stocks. They are a long shot and an easy target for scams. Furthermore, cryptos are used by scammers since they are a loosely regulated environment.
Ponzi Schemes in the Stock Market
Just as cryptocurrencies are used by scammers, so is the mainstream stock market. With that said, the market overall is not a scam. It is not the market or particular stock which is the source of the scam. It is how scammers are criminal brokers use the market and market these stocks.
Amway, Herbalife, & Young Living
Amway has a long history of accusations of being either a Ponzi scheme or a pyramid scam. You can say the same for Herbalife and Young living. These are all just theories and there is no proof of this being true. A more accurate description of them is multi-level marketing companies.
Herbalife Ponzi schemes probably do exist in some form. You should not associate these scams with the company but the individual scammers who organize them.
How to Protect Yourself from Ponzi Schemes
|Limited or no risk suggested|
|Consistently high returns|
|Improperly licensed operators|
|Lack of transparency|
|Difficulty removing funds|
Ponzi scheme red flags
The following are indicators of Ponzi schemes. These warning signs are not exhaustive meaning there are likely more. Using this information, you will know how to spot and avoid a Ponzi scheme.
Limited or no risk suggested
One way how you identify a Ponzi scheme is the suggestion of limited or no risk. There are risks in all investments. Saying there is little to no risk you would lose your investment is just a tactic. The scammer claims this to lure you into participating.
Consistently high returns
A scammer will use money from new recruits to pay you what is described as profits from your investment. They do this so you think your investment is always making money. And therefore you stay invested. But markets go up and down all the time. It is suspicious for your investment to consistently out-perform the results of every other broker.
Improperly licensed operators
Another way how to avoid Ponzi schemes is to research the organizer. Independently confirm they possess the proper licensing and other required credentials. Scammers go to great lengths to perpetuate a multimillion-dollar crime. It is not surprising they would do other things improperly as well.
Lack of transparency
Before you invest, or whenever you suspect a Ponzi scheme, ask questions. The deceptive investment strategies these scams involve are secret. A legitimate broker would be upfront and honest about their primary strategies. Someone unwilling or unable to describe how they operate is not trustworthy.
Difficulty removing funds
The last way how Ponzi schemes can be prevented is by identifying an investment trap. Simply requesting information about a withdrawal will help when detecting Ponzi schemes. The scammer may stall for time or try to convince you to keep your money invested.
This is because the scam requires your participation for them to keep going. The scammer needs new recruits in order to come up with the funds to repay you. Your actual investment has already been used for the personal benefit of the scammer.
Ponzi Scheme Victims
Scammers continue to use these tactics because Ponzi schemes can work for their benefit. If Ponzi schemes did not ever work, scammers would find a new strategy.
Unfortunately, the effects of Ponzi schemes on the victims are very real. What the victims lose includes not only their money, but their time, self-esteem, and trust in the market.
The full recovery of money from a Ponzi scheme is not likely. One positive note is a victim of a Ponzi scheme is eligible for tax relief. This is because the victim likely paid taxes on the fraudulent profits from the scam. This tax deduction can help offset the losses incurred during the scam.
You can enter losses as theft rather than an investment loss. Because it was a fraud and no investment likely happened. There is also no limit for how much you can enter on your tax return as opposed to losses from investments.
Where to Report Ponzi scheme
Ponzi schemes end when they are either discovered by authorities. Sometimes this is because the scammer cannot find enough new investors to satisfy the requests for withdrawals by current investors.
When they do end and you are a victim, how you report a Ponzi scheme would be through the Securities and Exchange Commission (SEC). This is who the market is regulated by. They accept reports by victims and whistleblowers and are the ones who investigate Ponzi schemes.
It can be a very stressful and emotional ordeal to fall victim to this kind of scam. Many people have lost their entire lives savings. Equally as frustrating can be the process of attempting to recover these losses. Often it is the case that your investment has been spent by the scammer and provided to other victims.
Sometimes when they bring a Ponzi scheme organizer to justice there is a glimmer of hope of recovering some of your money. That is because often in the addition to jail time they are sentenced to pay restitution. When these scammers spend your money on their lavish lifestyles this oftentimes includes houses and vehicles.
The government later seizes these assets which they then sell. Often they distribute the profits from these sales and this liquidation process to victims. For more information visit the following link to the SEC website there you can file a report and get more information.
Forex is not a Ponzi scheme. It is a real market for trading foreign currency. However, when working with a Forex trading broker, be wary of unrealistic profits. The above list of famous Ponzi schemes makes it clear there’s been at least one scheme active every year.
While we have established Forex is not a scam, it is still a common choice for exploitation. Before investing and periodically after you begin, examine your broker. Compare their actions to the red flags for avoiding a Ponzi scam.
For more information about Forex, read our article about the legality of Forex trading around the world.