- Authorities uncovered 60 alleged Ponzi schemes last year with a total $3.25 billion in investor funds — the highest amount since around the time of the Great Recession, according to new data.
- Bernard Madoff ran the largest Ponzi scheme in history, a $65 billion scam affecting thousands of investors that came to light in 2008.
- A booming stock market and de-regulatory emphasis in Washington may be leading more criminals to engage in investment fraud.
Investor money ensnared in alleged Ponzi schemes has hit its highest level in a decade, leading to concern that a booming stock market and de-regulatory agenda are pushing more fraudsters to bilk unsuspecting investors.
State and federal authorities uncovered 60 alleged Ponzi schemes last year with a total of $3.25 billion in investor funds — the largest amount of money unearthed in these scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.
A Ponzi scheme is a type of fraud whereby crooks steal money from investors and mask the theft by funneling returns to clients from funds contributed by newer investors.
Bernard Madoff ran the largest Ponzi scheme in history, a $65 billion scam encompassing thousands of investors that was uncovered in 2008.
Madoff, who is serving a 150-year sentence in federal prison, recently said he was dying from terminal kidney disease and asked a judge to grant him early release.
Ponzi schemes alleged by civil and criminal authorities last year pale in comparison to scams unearthed around the time of the 2008 financial crisis, such as Madoff's and those of other notorious criminals such as Thomas Petters and Allen Stanford, who ran respective $3.7 billion and $8 billion frauds.
In 2008, for example, authorities found 40 Ponzi schemes with a combined $23 billion of investor funds — roughly seven times the amount of funds from last year, according to Ponzitracker, data of which is compiled by Jordan Maglich, an attorney at Quarles & Brady.
While it's too soon to tell if last year's total was an anomaly, some experts fear it could herald a return to more sinister times.
"This is maybe not quite 2008 again, but the seeds are being planted for the next investor massacre," said Andrew Stoltmann, an investment fraud attorney based in Chicago.
A surging stock market, which may lead investors to lower their guard, and a de-regulatory environment at the federal level are two primary factors driving the growth in these frauds, Stoltmann said.
The stock market has been on its longest winning streak in history after emerging from the rubble of the Great Recession.
The S&P 500 stock market index was up 31.5% last year, when reinvested dividends are included, its best annual gain in six years. The only year that saw better annual performance over the past three decades was 1997, when the S&P 500 yielded 33.4%.
The Securities and Exchange Commission, the federal agency that polices investment fraud, has also been less aggressive under the Trump administration, Stoltmann said.
Indeed, the SEC has reduced the number of investigations it has opened. The agency opened 827 investigations in its 2019 fiscal year, which runs through October, a decrease from 869 investigations opened the prior year.
"[That sends] a de-facto dog whistle to stock criminals and stock thieves out there, and it emboldens them to engage in financial chicanery," Stoltmann said.
The challenge with Ponzi schemes is that investors are unlikely to know if they're victims until the stock market crashes, as happened during the financial crisis when clients tried redeeming their money only to realize it wasn't there, Stoltmann said.
And most of time, investors won't get all their money back.
Here are some red flags and tips to protect yourself from potential Ponzi schemes:
- Make sure your assets are "custodied," or held, at a legitimate firm (and not one made up by the broker). These firms are in a position to flag any suspicious activity. And in the event a fraud does occur, investors likely have a better avenue to recover some money in a lawsuit or arbitration, Stoltmann said. Call up the custodian listed on your account statement, ask if you have an active account and what the balance is.
- If it sounds too good to be true, it probably is. Be wary of brokers promising a high guaranteed return on your investment for little or no risk. A recent Bitcoin Ponzi scheme, for example, promised investors up to 7% interest per week.
- A static investment return on your account statement, especially during volatile markets, suggests the numbers may be artificial.
- Avoid brokers who are not "registered" with the SEC or the Financial Industry Regulatory Authority, which are federal regulators for investment advisors and brokers. Investors can check FINRA's BrokerCheck database to check their registration status.
- Google a broker's name and check for reports of past frauds. FINRA's BrokerCheck database also has reports detailing brokers' past disciplinary history.
- Never make a check payable directly to a broker. The broker could deposit that money into a personal bank account without your knowledge.