I’d Never Fall for a Ponzi Scheme

Most people think they would recognize a Ponzi scheme, but it’s not that easy.

Consider a recent SEC case involving approximately 300 investors and at least $140 million.

As usual, the investment had a plausible story. Investors were told their money would fund short-term bridge loans to businesses awaiting longer-term financing. The loans would generate interest, providing investors returns of up to 18%, substantially higher than current market rates.

Now imagine someone you trust has been investing for several years. They’ve received their interest payments and even gotten principal back. The person offering the investment is well known in your community, and other friends have invested successfully.

Initially, investor funds are used to make the bridge loans. Unfortunately, the loans do not perform as represented, and most loans ultimately default and cease making interest payments.

That’s when the Ponzi Scheme comes into play.  When the investments don’t perform as promised and often the firm’s partners have at the same time spent money that wasn’t theirs on travel, cars, or houses, they are forced to use new investor funds to make principal and interest payments to existing investors. This is where it all goes downhill.

“The promise of a high rate of return on an investment is a red flag that should make all potential investors think twice or maybe even three times before investing their money,” said Justin C. Jeffries, Associate Director of Enforcement for the SEC’s Atlanta Regional Office. “Unfortunately, we’ve seen this movie before - bad actors luring investors with promises of seemingly over-generous returns – and it does not end well.”