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SEC Cracks Down On Ponzi Schemes Promising Safe Investment Returns

Originally posted on Forbes.com

We’ve all heard about Ponzi schemers like Bernie Madoff who successfully convinced people to part with their hard-earned money with offers of consistently outsized returns.

You have to wonder how someone could be taken in by such fraudsters. But it continues to happen even to people who aren’t trying to beat the market.

That’s the kind of offer that creates interest. Thousands of everyday people were lured into in a "massive" $1.22 billion nationwide Ponzi scheme.

The scheme affected 8,400 investors, 2,600 of whom "invested" through their Individual Retirement Accounts.

The Hook

The allure was simple: A safe and secure promissory note paying 5-8% interest.

According to the August 2018 U.S. Securities and Exchange Commission (SEC) complaint, “[i]nvestors were unquestionably motivated by the high rate of returns that the [defendant] offered and investors viewed these as passive investments generating safe returns.” 

The promise of high returns plus safety. . . That’s the ticket for the fraudster. And, that’s the lure for the retiree.

However, the defendant’s “business model was a sham,” according to the complaint.

Red Flags

There were red flags. For example, if you looked up the defendants on the SEC’s website to see if they were licensed to sell investments (Investors.gov), you wouldn’t have found them listed.

In this case, the defendants held no securities licenses, were not registered with the SEC, were not associated with registered broker-dealers, nor exempt from registration, according to the SEC complaint. If someone had looked up the people involved, they would be on notice that these individuals were not authorized by law to sell securities.

Of course, that’s not enough – Madoff would have passed this test – but it’s a start.

Too Good to be True?

Equally important is the promised reward, which is really the heart of the fraud.

The “hallmark” of a fraud centers on giving the mark what he wants: large profits at no risk. As the SEC points out: “Every investment has risk, and the potential for high returns usually comes with high risk. If it sounds too good to be true, it probably is.” See the SEC’s 2018 Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force Investor Alert: “Ponzi Schemes Targeting Seniors.”

Add a promise of consistency of returns, especially to retirees, and the attraction is increased. Fraudsters know that. As the SEC points out in the Alert, “Investment values tend to fluctuate over time. Be skeptical of an investment that generates steady positive returns regardless of market conditions.”

Last week (December 13, 2018), the SEC charged a father-daughter team in a bond scheme that benefited the fraudsters at the expense of even their families. They allegedly used the money meant for bond purchases for personal and business expenses, including jewelry, furs and a limo driver.

The SEC's Role

The SEC plays an important role in routing out scoundrels and alerting investors about how to avoid bad actors. That’s a two-pronged effort between OIEA and Enforcement. As Charu A. Chandrasekhar, Chief of the SEC’s Division of Enforcement’s Retail Strategy Task Force, pointed out, “The Enforcement Division protects retail investors by bringing impactful cases and partnering with OIEA to provide investors with tools to educate and empower themselves.”

Enforcement may also coordinate with the U.S. Attorney’s Office, the U.S. Postal Inspection Service and the Federal Bureau of Investigation, as it did in this case.


Bad actors may find themselves permanently banned from the brokerage industry, serving time in jail and having to disgorge their ill-gotten gains.

In my many years of financial literacy advocacy and decades in the trenches as a lawyer and money manager, I cannot emphasize enough that retirees in particular need to protect themselves against the untoward – even to the point of resisting the urge to put themselves in a sales environment, such as a free-dinner presentation.

While many are legitimate, why put yourself in a situation in which the other person’s agenda has priority over yours?

Plus, retirees have to be alert to the investor’s dilemma: wanting high returns and safety. They don’t usually go together. * * *

To read Julie Jason's books, go to: https://juliejason.com/books/julies-books.