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Unfortunately, financial market fraud is very common. Trading volumes are constantly growing, new brokers appear, and old ones are constantly increasing their client base. The more funds pass through the global financial markets, the greater the interest of the fraudsters and cybercriminals.
One of the most popular fraudulent maneuvers ever perpetrated on the financially interested is the age-old Ponzi scheme. The scheme only works if you allow yourself to be swayed by the hoaxer. Critical thinking, vigilance, and your own prudence are your main defenses. Follow the Traders Union as it explores the details about what a Ponzi scheme is and how it works. Next, TU will review a few well-documented examples of this dreadful plot and, finally, examine how you can best protect yourself.
What is a Ponzi scheme? Definition
A Ponzi scheme may be defined as a fraudulent scheme in which the perpetrators attract investors and pay them a relatively small profit from new investors just before the criminals abscond with the overwhelming bounty of the funds.
The Ponzi scheme gets its name from Charles Ponzi. In the 1920s, he founded a company that handled legal arbitration. However, over time, he began to use the money of new clients to pay off old obligations that the new clients had nothing to do with. When the scheme was ultimately revealed, the case became widely known over the USA and even globally, and the press called it “The Ponzi Scheme”. The name stuck to this method of fraud.
The scheme usually follows this rubric:
Scammers register the platform and convince the first round of clients to invest in the company, aka “a sure thing”;
Perpetrators continue to search for new victims, convincing each set to invest in the get-rich-quick financial plan. As more and more funds are raised, they pay profit to the “early” clients who have already invested money. This keeps up the excitement and demonstrates the investment plan is the real deal.
Then they convince the investors who were paid the money to reinvest in the service. Most of the victims agree because they believe the company is legitimate as long as it pays back the promised profits;
As soon as the inflow of new funds stops (or the fraudsters decide that they have enough profits in their pockets), they abscond with the lion’s share of the money. Extra greedy fraudsters just keep milking the scheme until everybody eventually stops investing and because there is no money left, nobody gets paid anymore, and the entire house of cards simply collapses. But the schemers don’t mind because they have been skimming money off the top all along, so they have already filled their deep pockets. After that, the company operating under the Ponzi scheme ceases to exist.
A fraudulent company works as long as it manages to maintain the illusion of a sustainable business. As soon as customers stop investing, the attackers take the money that has already been invested in the platform and register a new project. The old organization is liquidated and it is almost impossible to get a refund.
How Ponzi schemes work
The Ponzi scheme scam has several features. Let's consider them in more detail:
Scammers offer an unreasonably high return on investment. Their main task is to awaken in the trader a sense of greed and a desire to get big money easily and fast;
The broker or investment platform does not disclose the details of earning income. Traders will not be able to learn the portfolio of managers, and they cannot control what assets the manager invests in;
"Cold calls". Scammers find contacts in open sources and call them with offers to invest. Calls and contacts on social networks can be persistent, and attackers may do that several times a day.
Representatives of the companies actively urge you not to withdraw funds/profits. Yes, scammers working under the Ponzi scheme pay clients for a certain period, maintaining the mirage of a legitimate and trustworthy enterprise. Your withdrawing funds from the system presents a problem for them. Therefore, they are trying to convince the trader to reinvest the money in every way.
Lack of license. Scammers often do not waste time and money obtaining licenses from reputable regulators. They just obtain an offshore license, a "conformity certificate" from a private company, or even work without any permission.
If you notice such signs, you are likely cooperating with scammers using the Ponzi scheme. You need to be extremely careful with such companies, and if you suspect that you are being offered cooperation with a fraudulent broker or investment platform, it is better to refuse it or get out quick!
Ponzi scheme vs a pyramid scheme
It is worth noting the differences between these two paradigms. They both involve the common thread of payments made to previous investors at the expense of subsequent investors. But the key difference is the principle of customer attraction.
The Pyramid scheme works in such a way that users themselves attract new investors. There is a profitable affiliate program, bonuses for people attracting more traders, etc. Thus, the main feature of the Pyramid scheme is decentralization.
The Ponzi scheme is centralized. The representatives of the broker or the investment platform are engaged in attracting clients. The Ponzi scheme is characterized by “aggressive marketing”, and such brokers may not have an affiliate program at all.
Famous Ponzi examples
The Ponzi scheme is widely used by scam brokers. There were even high-profile examples from world practice, in which…
Bernie Madoff Ponzi scheme
The Bernie Madoff Ponzi scheme is one of the most famous scams of this type worldwide. The scheme itself last almost 50 years. Its founder, Bernard Madoff, was one of the leading American financiers of the mid-20th century. He was able to defraud such large funds as Fairfield Sentry Ltd, Kingate Global Fund Ltd, banks - Santander, HSBC, BNP Paribas, and the Royal Bank of Scotland, etc. A large charity, Robert I. Lappin Charitable Foundation, after the collapse of the scam went bankrupt.
In the 1960s, Bernie opened his own investment company, Madoff Investment Securities, LLC, which offered clients investment services in stocks and other securities. Representatives of the company called potential clients and offered investments at an attractive interest rate of 12-13% per annum.
Madoff was trusted because his company paid consistently, and he himself was one of the co-founders of Nasdaq and held a post on its board of founders. Representatives of the investment company assured investors that the success of Madoff Investment Securities LLC was due to insider trading (Bernie held a high position and had access to non-public trading information).
However, in 2008, the scam was revealed, but only after the entire global economy experienced a meltdown. After the worldwide financial crisis erupted, large investors turned to Madoff to return their investments prematurely. However, Bernie had nothing with which to pay. The investigation established that since 1995 Madoff Investments Securities had not conducted any investment activities and had paid money only by attracting new clients.
Madoff pleaded guilty in full on 11 counts, including fraud and money laundering. On June 29, 2009, Bernie was sentenced to 150 years in prison. The total damage caused by the Bernie Madoff Ponzi Scheme was $64.8 billion, of which only US$18 billion was reimbursed to investors. Bernie recently died of natural causes on April 14, 2023, while he remained in prison.
Allen Stanford Ponzi scheme
Texas financier Allen Stanford became the creator of another well-known Ponzi scheme in the United States and managed to make a fortune of USD 2.2 billion on the plot. Stanford managed to defraud over 30,000 investors from all over the world.
In 1993, Stanford Financial Group was established, which positioned itself as an investment fund. Seven years earlier, in 1986, Allen Stanford founded Stanford International Bank, which earned a good reputation. The scheme was classic. Stanford and his employees contacted clients offering the services of their investment company. All payments to his clients were made on time. Stanford became so famous that the authoritative publication World Finance in 2008 awarded him the title of "Person of the Year". After that, the company existed for less than a year.
In 2008, Stanford Financial Group's reputation was hit by two financiers who quit the fund. They filed lawsuits against the company, noting that the organization was engaged in fraudulent activities. Amid the then-collapsing Bernie Madoff Ponzi scheme, the Allen Stanford story caused quite a stir, and Stanford Financial Group released a statement that it had nothing to do with such activities. However, in February 2009, the United States Securities and Exchange Commission (SEC) initiated an audit of the Stanford company, after which charges were brought against Stanford for fraud and violations of US financial laws.
In 2012, Allen Stanford was sentenced to 110 years in prison. At the time of the collapse of the Ponzi scheme, the company managed assets worth US$50 billion. The total amount of damage was US$9.2 billion.
What are the risks of a Ponzi scheme
Cooperation with a Ponzi scheme carries significant risks. The primary risks involve substantial monetary losses. In the event of the collapse of the Ponzi scheme, it will be almost impossible to get the money back.
Therefore, before you start working with any company, you need to check whether it is fraudulent or not. It is necessary to pay attention to the following factors:
Licensed by a reputable regulator. Only a company that has a permit for financial activities can be legal. Only the state regulator can issue the document. It is recommended to cooperate with companies that have licenses from reputable regulators such as SEC (USA), FCA (UK), CySec (Cyprus), BaFin (Germany), ASIC (Australia), etc. Such companies can be found here in the Traders Union broker rating.
Availability of reviews. Track reviews on independent platforms. There you may find useful information about the activities of the company. For example, you can read objective reviews on the Traders Union website. Here you can also leave your review if you had a negative experience of cooperation with scammers.
Transparent income generation scheme. A broker or investment platform should provide an opportunity for traders to track the actions of managers and follow their decisions. The company must provide detailed information on how the profitability will be provided.
No questionable provisions in internal documents. Before starting cooperation, thoroughly examine the User Agreement. For example, a broker or an investment platform cannot spell out their permission to block an account, cancel orders or prohibit the withdrawal of funds "at their own discretion" and "without explanation".
Be careful with “cold calls”. Reputable brokers and investment firms do not use “aggressive marketing”. If they call you and offer to invest funds on super favorable terms, do not rush to agree. Ask questions about licenses, income-generating stratagems, and demand as much information as possible.
Only your own vigilance can protect you from the possible money loss and from cooperation with the Ponzi scheme.
Is the Ponzi scheme a fraud?
In theory, Ponzi scheme companies could be legal. For example, the organizations we reviewed above honestly paid customers their profits. Some companies can officially operate using this scheme - they receive licenses, pay income, and pay taxes, etc.
However, in most cases, the Ponzi scheme is used by fraudsters to obtain funds illegally. The goal of the attackers is to raise as much money as possible and liquidate the company. Therefore, it is not uncommon for websites to publish false information that can be easily verified. For example, if scammers claim that the company has been operating for 15 years, but there is not a single review on the network - then you should be very wary of his promises. So this is a new company. And if it provides false information, it is a scammer.
Can I earn profits by joining a Ponzi scheme?
If you have any reason to believe that this is a Ponzi scheme, you should never cooperate with such a company. Yes, such organizations can indeed accrue profits to customers, at least at the beginning of the ploy. However, there is no guarantee that scammers will allow you to withdraw your money. Often, attackers persuade investors to reinvest funds, and in case of refusal, they “play for time,” claiming that delays are related to “banking problems,” “technical reasons,” etc.
In addition, it is important to understand that profits in the Ponzi Scheme are driven by new members. As soon as the influx of investments ends, the company will collapse. Exactly when the collapse will occur is impossible to predict. Therefore, the risks of losing money are much higher than the potential profit.
Top 3 trustworthy brokers to consider
It is only possible to make money trading or investing with a reliable broker. Traders Union has selected brokers that are rated by our community to meet all security requirements and provide good trading opportunities.
FxPro has been operating since 2006. The company operates under four licenses:
Great Britain - FCA # 509956
Cyprus - CySEC # 078/07;
South Africa - FSCA # 45052;
Bahamas - SCB SIA-F184.
The company has more than 200 types of trading instruments available to its clients, including a wide selection of CFDs on stocks, commodities, futures, and indices. At FxPro, traders can work with a minimum deposit of USD 100. The work is performed in the MetaTrader 4 and MetaTrader 5 terminals. Also, the broker has developed its own mobile application, the FxPro Trading Platform. The company does not impose restrictions on trading strategies and supports automated trading.
The XM Group has been offering brokerage services to clients since 2006. The company operates under the following licenses:
Cyprus - CySEC 120/10;
Australia - ASIC AFSL # 443670;
Belize - IFSC No. 000261/106.
The XM Group offers a large selection of trading assets - more than 1,300. Actual stocks are also available to clients. The broker is suitable for Forex traders who deal with currencies because the company offers 55 currency pairs for trade. The company provides its clients with the well-known trading platforms MetaTrader 4 and MetaTrader 5. The XM Group is also suitable for traders who wish to receive additional benefits from special offers and bonuses.
The Admirals broker has been offering brokerage and investment services to clients since 2001. The company was rebranded from Admiral Markets to simply Admirals in 2023. The broker has received the following licenses to conduct financial activities:
Great Britain - FCA # 595450
Cyprus - CySec # 201/13
Australia - ASIC AFSL # 410681.
The broker offers clients over 3,500 assets. The company will be a good investment choice as it offers a large number of actual stocks and ETFs. Admirals provides clients with access to the MetaTrader 4 and MetaTrader 5 trading terminals. The broker has a free VPS server available, which will keep trades open even if the terminal is closed.
Expert’s opinion
The Ponzi scheme is a popular scam in the financial markets. Attackers often use it to generate short-term profits from investors who are willing to believe in a fake project. The Ponzi scheme can work in cases where the attacker has good persuasive skills, therefore aggressive marketing is a characteristic feature of such a scam.
To protect yourself from the Ponzi scheme, it is recommended to ask questions. There should be many questions to the manager who may contact you. Ask absolutely anything that interests you and mind his reaction. If he cannot answer how the company's profit will increase, how the managers work, whether the company’s portfolio is available for you to review, etc., and tries to “get off” with general phrases, do not cooperate with his firm. You should get a clear and specific answer to all questions.
In addition, it is important to check the license of such an organization, because if there is no permit for financial activities, the company is operating illegally. Always cooperate only with reliable and trusted organizations.
Antony Robertson,
Traders Union Financial Analyst
Ponzi Scheme reviews
I have recently had an experience of cooperation with a fraudulent company. When I was just starting to invest, they called me and offered to invest money at an attractive interest rate. I was paid for some time and persuaded to reinvest the money. I was persuaded and the amount grew by leaps and bounds. However, after 2 months the company stopped paying and I was left without my funds.
Julian Moeringer
investor
Berlin
I came across the Ponzi scheme when I didn't even plan to invest. The manager of the company contacted me, spoke eloquently about the benefits, and I decided to try it. I invested a small amount and made a profit. I was persuaded to reinvest the money and to add more. I agreed. But then the managers stopped communicating, and the site simply disappeared. I lost a lot of money, but I realized that investments require a more careful approach.
Correa di Santo
teacher
Buenos Aires
Recently, I received an email offer to invest in an investment company. I agreed to speak to the manager on the phone, but when I started asking questions, suspicions arose. When I started questioning how the investment company would make money, the manager started to get confused and tried to get away with general phrases. I refused, and after a while, I found out that the company had collapsed.
Maria de la Fuente
manager
New York
FAQs
I saw a lot of good reviews on the broker's website, but not everything is clear on independent services. Is it worth believing it?
No. The broker may have removed negative comments from their website. Opinions can only be viewed on platforms that are not directly related to brokers.
I am convinced that the investment company has been operating for a long time. How can I check it?
Yes, very easily. Ask what year the company was founded, then check the license date and reviews. If there are no reviews or there are few of them, the company has been created quite recently.
The broker representatives say they have a Belize license, but it is offshore. Should I believe them?
Belize is truly a classic offshore, so this broker should be treated with caution. Check if there is a license from a reputable regulator in addition to the Belize license. Check reviews. Check other company documents.
Can I get a refund in case of fraud?
In theory, it is possible, in practice the chances of this are very low. Scammers do not disclose their names, and companies are often registered offshore, and after the collapse of the Ponzi scheme, they are quickly liquidated. It is difficult to find them. Therefore, it is better to work with trusted brokers.
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
A Ponzi scheme may be defined as a fraudulent scheme in which the perpetrators attract investors and pay them a relatively small profit from new investors just before the criminals abscond with the overwhelming bounty of the funds.
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
CFD is a contract between an investor/trader and seller that demonstrates that the trader will need to pay the price difference between the current value of the asset and its value at the time of contract to the seller.
Bruce Powers is an expert trader and technical analyst with over 20 years of experience in Forex, commodities, ETFs, cryptocurrencies and other assets. He is an active trader, technical and fundamental analyst, media commentator, educator and a writer. As an author for Traders Union, he contributes his deep analytical skills, expertise and understanding of the global economy and financial markets to provide market analysis and insights. Powers is also a frequent guest on business TV news shows.
Jason Law is a freelance writer and journalist and a Traders Union website contributor. While his main areas of expertise are currently finance and investing, he’s also a generalist writer covering news, current events, and travel.
Jason’s experience includes being an editor for South24 News and writing for the Vietnam Times newspaper. He is also an avid investor and an active stock and cryptocurrency trader with several years of experience.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).
