The Ponzi scheme was named after Charles Ponzi, an Italian immigrant who was arrested in 1920 for conning New England residents out of millions of dollars. The scheme, in one form or another, continues today.
The Great Recession has brought to light many investment frauds that, during the stock market’s bull market, were previously undetected. Ponzi schemes come in all shapes and sizes but there are some common red flags.
The fraud may not be massive like Bernard Madoff's alleged $50 billion scheme, but, like the Madoff case, may be an investment program managed and controlled by one individual or a small group of individuals. It is typically based on the confidence invested in a single individual–hence the term “con-man.” A red flag may be that the returns are too good to be true. But in the more sophisticated schemes, the profits don't have to be spectacularly large; they may be consistent or slightly above returns on other similar types of investments.
Unfortunately, the other common fact is that Ponzi schemes are most obvious only after the fact, usually after the perpetrator has dissipated the invested funds for personal use or used them to pay returns to earlier investors.
Due diligence requires prospective investors to verify the claims and investment formula of private investment managers to protect from such financial devastation.
If you suspect a Ponzi scheme or other financial fraud, seek assistance of an attorney who can help uncover the fraud and seek appropriate relief for the loss.