Individuals and organizations look for areas where they may invest their money to get good returns. However, all investments carry some degree of risk. The level of risk is the major factor that determines the investment decision.
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High-risk investments usually have high returns. On the other hand, low risk investments have low returns. The profit from the investment enables an operator to pay returns to the investors.
The investment market is full of fraudsters. Fraudsters usually offer attractive returns on an investment. However, they may fail to offer the returns or disappear with the money altogether.
A Ponzi scheme is one of the most common fraudulent investments. A Ponzi scheme is an investment fraud where an operator promises to offer returns that are significantly higher than those of the traditional investments.
However, instead of investing the funds the operator pays returns to the investors using the funds from new investors (Kovacich 123).
A Ponzi scheme depends on the availability of new investors who would provide funds to pay off existing investors. In addition, the new investors must provide sufficient funds to pay off existing investors.
Therefore, it is critical for a Ponzi scheme to attract new investors into the scheme continuously (Kovacich 123). In the US, the Securities and Exchange Commission (SEC) strives to detect Ponzi schemes to protect investors funds.
The SEC investigates schemes that offer significantly higher returns than traditional investments, yet they are unable to offer conclusive explanations on how their source of profits.
Despite the efforts of the SEC, Ponzi schemes may run for decades without detection. This was the case in Bernie Madoff’s Ponzi scheme.
Billionaire Bernie Madoff was an operator of one of longest Ponzi schemes. Madoff’s Ponzi scheme continued undetected for over two decades. The billionaire exploited the image that people had of his success to swindle investors over $50 billion.
Madoff’s Ponzi scheme is largest Ponzi scheme ever. People invested in Madoff’s Ponzi scheme since they had trust in the billionaire.
This provided Madoff with a leeway to con unsuspecting investors. Madoff’s Ponzi scheme is a clear illustration of the extent to which people may go to exploit unsuspecting investors.
Madoff may have engaged in the Ponzi scheme to finance his lucrative lifestyle. The Ponzi scheme provided him with easy cash. The Ponzi scheme may have also him with funds to run other businesses that he owned.
Early detection of a Ponzi scheme enables the SEC to save investors from huge losses. To detect Ponzi schemes, investors should be wary of investments that offer high returns with little or no risk. Normally, high return investments have high risks.
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However, Ponzi schemes guarantee their customers consistent high returns. Investors should also be wary of investments whose strategies are complex to understand. An investor should understand how the investment brings returns.
Investors should desist from investing in investments that they cannot understand. This is one of the most effective methods of detecting Ponzi schemes (Benson 5). Investors should also be wary of investment managers who want complete of their money.
Ideally, a big broker- dealer firm that is regulated by the Financial Industry Regulation Authority should hold the investment funds (Arends para 4).
It is impossible for an investment manager to run a Ponzi scheme if a different party is in control of the funds. Following these measures would greatly reduce the probability of falling prey to Ponzi schemes.
Arends, Brett. “These red flags can signal Ponzi scheme.” The Wall Street Journal. 16 December 2008. Web. https://www.wsj.com/articles/SB122937799268308369
Benson, Sandra S. “Recognizing the red flags of a Ponzi scheme.” Current Accounts. November/December 2009. Web.
Kovacich, Gerald L. Fighting fraud: How to establish and manage an anti-fraud program. Burlington, MA: Butterworth-Heinemann, 2007. Print.