What is a Ponzi Scheme?
Made famous in the United States by Charles Ponzi, these scams promise high returns on investments. Each participant is encouraged to bring in new investors, but there is no actual investment. Investors’ money is used to pay out returns to those drawn into the scheme to create the appearance of a profitable investment. The only people who make money are the fraudsters who skim money from the scheme.
How Does it Work?
Ponzi schemes require a constant inflow of new investors’ money or they collapse. Even though the original investors sometimes see returns, they usually do not get all of their money back.
To be successful, fraudsters need to earn the trust of an influential person in a group, family, or workplace. Once they establish this bond, they use this connection to get their hands on the money of other people in the group. In some cases, they may even pay the influencer to help them out, never telling the person the investment is really a scam.
Fraudsters often encourage original investors to “roll over” or reinvest their funds in the scheme. To get people reinvesting or to help with the word-of-mouth promotion of the scheme, the scammers pay a return to early investors from deposits made by later investors. Fraudsters may also create fake statements to show investors how their funds are growing at a phenomenal rate.
Believing their investment is successful, existing investors endorse it and convince others of its value. In the end, the supply of new investors runs out, the whole scheme collapses, and the fraudster makes off with most of the money.
Watch Out for One or More of These Common Characteristics:
- Any talk about pooling your money with other investors.
- People touting complicated, secret investments that have some kind of exclusivity to them.
- Individuals selling investment products who are not registered to trade securities or other investment products.
- Statements and contracts not associated with a registered firm, or documentation that looks like it could be a forgery.
Remember to always check registration before you invest. Use the National Registration Search from the Canadian Securities Administrators (CSA) to determine if an individual or firm is registered.
Watch our Ponzi 101 video:
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.
Last week, the BCSC issued a panel decision finding four BC residents had perpetrated a “deliberate and well-organized” fraud in a Ponzi scheme that resulted in the loss of over US$10 million by more than 800 investors in BC and elsewhere. Media, CTV in particular, researched the case and found several victims who were willing to […]
In August, the BC Securities Commission (BCSC) issued one notice of hearing, three enforcement decisions, and a news release about reciprocal orders against three individuals. The Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association (MFDA) did not release any decisions or settlements relating to BC residents. You can find a summary […]