Bernie Madoff recently died. Madoff was known for operating the largest Ponzi scheme in history. So what is a Ponzi scheme and how can businesses protect themselves?
What is a Ponzi Scheme?
A Ponzi scheme is a form of investment fraud in which the scammer promises investors large returns with little or no risk. The scammer then uses the investments of later investors to pay earlier investors their “returns.” This system works until the scammer runs out of new investors. When this happens, there is no longer a stream of revenue and the scheme collapses.
How Can Business Owners Protect Themselves?
Although it can sometimes be difficult to prove an investment strategy is or is not a Ponzi scheme, there are several warning signs investors should look for. If you’re skeptical because something seems too good to be true, it likely is. If a strategy offers exceptional returns with little risk regardless of economic conditions, there is reason to be weary. To avoid potential Ponzi schemes, you should make sure the group you invest with is verified by the Financial Industry Regulatory Authority (FINRA). Look for any negative information to see if the investment firm has a record of suspicious behavior. Check to confirm that the investment is registered with the Securities and Exchange Commission (SEC). The investment firm should be willing to explain the investment strategy.
You should also be able to view paperwork relating to their investment and retain the ability to withdraw money if you would like.