Ponzi Schemes Take Many Forms - and Only One - At the Same Time
If you look at the vast array of different investment scams and frauds that have been called “Ponzi Schemes” in the last few years, you might wonder how this term could be so broadly assigned and still mean something. The answer is that Ponzi Schemes, while coming in all kinds of flavors on the outside, are all the same - on the inside.
You see, Ponzi schemes all promise to invest your money in different financial assets. These can range from a hedge fund or fund of funds to an investment group that owns a resort on some distant tropical island. The actual type of investment promised by the scheme matters not at all. That’s because, in many cases, the operators behind a Ponzi Scheme never actually invest the money they’re given.
The essence of a Ponzi Scheme is that, rather paying investors from the profits made from their investments, they are being paid from the money collected from newer recruits to the scheme. In other words, each successive generation of recruits to the scheme pays the previous investors their profit. This goes on and on and on, sometimes for decades, until one day either somebody gets a whiff of what’s actually going on, or the person behind the fund fails to recruit a sufficient number of new investors to pay off all the existing investors. Then, the Ponzi Scheme collapses like a house of cards…
Hedge Fund Manager Goes Down for Ponzi Scheme
The latest Ponzi Scheme to hit the headlines comes to us from Boston, where a local hedge fund manager plead guilty to wire fraud, mail fraud, and unlawful monetary transactions in court the other day. Raymond Montoya of Allston was in fact running a multi-million dollar Ponzi Scheme.
According to the Massachusetts Depart of Justice, Raymond Montoya ran his scheme for almost a decade under the auspices of a fund called RMA Strategic Opportunity Fund, LLC. Over the years, investors transferred millions of dollars to Montoya on the promise that he would invest the money in stocks and bonds. He lied to family and friends and took their money, then diverted a large portion of it into his own business and personal accounts while paying off other investors to keep the game going.
The charges brought against Montoya carry a sentence of no more than 20 years and a fine of $250,000, or twice the value of the criminally diverted property.
Common Signs of a Ponzi Scheme
Once you're inside a Ponzi Scheme, it can look and feel a lot like a normal investment opportunity, especially if the scheme operator is adept at creating false investment documentation. The key is not to get draw into a Ponzi Scheme in the first place. The most common signs of these frauds are evident from the beginning - that's when you have the greatest chance of identifying them.
Inflated investment returns
Guaranteed investment returns
Tax-free investment returns
Vagueness about the actual investments
Overly simplified investment documentation - or none at all
Lack of true expertise or history in sophisticated investing