Ponzi Schemes: What They Are and How to Avoid Them

There are investment deals that are just too good to be true. One of those deals is the Ponzi scheme. For decades, experienced financier Bernie Madoff promised his investors substantial, yet stable returns using the split-strike conversion strategy. This is a viable plan that involved:

Buying a handful of shares from companies in the S&P 500.

Sell call options to limit how much the stock can be bought no matter how high the market goes.

Buy put options that also limit the stock’s price no matter how low the market falls.

Too Good to be True

This ensures that the investor has some control over what they lose or gain. While this is a safe strategy that would’ve made a lot of clients happy, Madoff didn’t use it at all. Instead, he deposited their money into one bank account. He used this fund to pay off people who wanted to cash out on their investment with him.

Because he pledged that his clients were going to see large returns, he had to find a way to generate more money. And it was simple: get more people to invest in the scheme. This process worked for over a decade. His operation looked clean because he was updated with paperwork and he kept his partners satisfied with their returns. However, it was put to a screeching halt when the market crashed in 2008.

Running Out of Steam

Madoff eventually ran out of money in his fund and resorted to borrowing just to pay off his clients. With nowhere to go, he confessed to his sons, who turned him over to the FBI. He was slapped with a plethora of charges, including securities fraud, perjury, money laundering, and more. He pleaded guilty in 2009 and was sentenced to 150 years of imprisonment.

Avoiding the Ponzi Scheme

What Madoff pulled off all those years was a classic Ponzi scheme. It promises investors high returns with low risks. It generates money by continuously getting initial investments from new clients. Being duped by this scheme is painful because of the money you’ll lose and the embarrassment that goes with it. Being an unknowing accomplice is worse, as you may end up going to jail unless you settle a plan with the nearest 24/7 bail bond service in Utah. Here are signs you might be getting Ponzi-d.

  1. Large Income, Little to No Effort – Ponzi artists will often tell you that you’ll get a large amount of money when you invest with them. And the clincher is that you don’t have to work for it. Walk away once you hear this or the phrase “easy money.”
  1. The Calculations are Off – Schemesters will discourage you from probing into their strategy or even calculating how much you’ll gain from it. It most likely won’t add up, so they’ll try their damnedest to dodge your questions and tell you to just trust them.
  1. It’s Hard to Cash Out – If you somehow got into the scheme and want to cash out, your contact will probably tell you to wait a while to “see if you’ll earn more” or other delay tactics. Not everyone can deliver on time as Madoff did.

Despite the countless arrests on Ponzi masterminds throughout the years, this scam can be masked in many legitimate-looking forms. It can be a business that sells fruit juices or trades cryptocurrencyas a front. No matter how hard they try to hide their plan, you can identify them using the warning signs above. It pays to stay vigilant.

Meta Title: Ponzi Schemes: How to Identify and Avoid Them

Meta Description: A Ponzi scheme is an investment deal that’s just too good to be true. Know how it works, why it’s bogus, and how you can avoid getting scammed by it.

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