After several scandals hit the news, most investors began taking extra measures to preserve their assets. While it is easy to tell a fraudulent deal when it sounds too good to be true, it may not be very easy to tell if it is a small scale. However, experienced investors are likely to know when a deal is too good and avoid it. Even so, some fall prey to fraudulent dealers who target unsuspecting individuals hungry for investments. When this happens, knowing what to do comes in handy.
Defining a Ponzi Scheme
A Ponzi scheme is best described as a fraudulent investment operation that pays investors from their cash or uses the cash paid by new investors later, as opposed to paying from the earnings or revenues made. Such schemes are categorized as illegal, and will always focus on ripping off one investor to pay another, hence making them unsustainable. In most cases, the bubble bursts when the scheme can no longer attract new investors. Ponzi scheme victims only have a chance of recovering when the Ponzi schemer is linked to a registered brokerage firm. Any other dealings should be considered a total loss because there are limited follow-up channels to consider when things go wrong.
When Brokerage Firms Are Liable for Ponzi Schemes
A brokerage firm may be liable for the broker’s Ponzi scheme in two instances.
Brokerage firms may be liable when they fail to supervise their brokers, which they should. Claims of not knowing that the brokers operated illegally or without a license will not cut it. Whenever the brokerage firm fails to adequately supervise its brokers, it can be liable for the losses sustained by victims in case of fraudulent operations.
The brokerage firm is charged with the responsibility of monitoring and pointing out any strange dealings. The brokerage firm can be forced to pay for the losses incurred by clients in a Ponzi scheme, regardless of whether the brokerage firm was aware of the fraudulent activities.
Every state has its own securities laws. Laws may vary depending on the state one is from, but the bottom line is that every state requires that brokerage firms, brokers, and security offerings be registered. This means that a Ponzi scheme operates illegally because the offered securities are unregistered.
In such cases, the biggest concerns remain who needs to be held responsible for allowing such operations. The laws depend on the state. Some states put all liability on anyone who receives fraud compensation, whether directly or indirectly. In some cases, anyone selling or aiding the seller to make a fraudulent sale will be liable.
Financial institutions supporting the transactions of schemers will also be liable. It is the responsibility of such organizations to follow up on any red flags they notice. Ignoring these signs and accepting compensation from the schemer is considered an illegal offense in most states.
What Happens when You Sue the Schemer
Victims who fall prey to Ponzi schemes will naturally want to sue or take civil action. Often, this is the best move. Unfortunately, it may not yield much in terms of recovering the lost cash, because when it gets to a point where the schemers are discovered, they have probably spent all the cash. As an investor, the best you will get from taking legal action is having the schemers serve a jail term.
However, experience shows that investors can easily recover their cash when they focus on the schemer’s supervising brokerage firm. The victims can also look at other third parties linked to the Ponzi schemers to see if there are any legally binding measures they can explore to recover part, if not all, of their lost cash. Focus on those third parties that have the ability to pay what you lost. Whatever you do, make sure of the following:
- Avoid calling your broker lest you say something incriminating
- Get your paperwork right by gathering all relevant evidence
- Get in touch with a lawyer for all the legal support you need.
While it is not always possible to know who a Ponzi schemer is, taking the necessary steps to protect your investment is crucial. When the worst happens, work with a lawyer to retrieve whatever you can.