Bernie Madoff

Have you heard of Bernie Madoff? He was a well-known Wall Street investment advisor who became known in the world for operating the biggest Ponzi scheme in history. The investment fraud that he committed was uncovered in 2008. Due to this, Bernie’s investors incurred a loss of nearly $50 billion over 20 years. But, what is a Ponzi Scheme?

 In a Ponzi scheme, the individual running the Ponzi scheme promises to invest the money they collect from investors to generate supernormal profits with little to no risk. However, the organizer doesn’t invest the money. They pay off the investor with money they collect from new investors as “returns” to make the scheme look believable. Thus, a Ponzi scheme requires constantly recruiting new investors to prevent the scheme from failing.

A Ponzi scheme is different from a Pyramid scheme. In a Ponzi scheme, investors are made to believe that they are earning returns from their investment (when in reality, the money isn’t invested in legitimate investment options, so they aren’t earning any returns). While, in a Pyramid scheme, the participants are aware that they need to recruit more people to the scheme to be able to make profits.  

One should look out for the ‘Red Flags’ to prevent being a victim of the Ponzi Scheme when high returns are guaranteed with little to no risk. Every investment carries a certain amount of risk. Apart from this, if an investment is guaranteeing high returns, it will carry more risk. Such an investment option is too good to be true. Therefore, exercise caution.

Be cautious if an investment is providing regular positive returns regardless of the market conditions. Market conditions keep on changing which affects the returns provided on an investment. Thus, it is impossible to get consistent returns on an investment.

Investment companies must be registered with the SEC (U.S. Securities and Exchange Commission). Before rushing into an investment, ensure the investments are registered with the SEC. Similarly, an investment professional or firm must be registered or licensed with a regulating body. Most Ponzi schemes involve unlicensed individuals or firms.

In conclusion, investors should be careful before getting involved in investments that sound too good to be true. One must always exercise caution before making investments or getting involved with individuals that promise high returns and little to no risk investments. Happy Investing!