Ponzi-type scams

Ponzi-style scams are still going strong …

… but for how much longer

In our last blog, we looked at online banking fraud and how easy it is to be scammed by cyber-criminals. In this article, we’ll look at another form of fraud; one that’s been around a lot longer than online fraud – in fact, a lot longer than online ‘anything’. The first Ponzi schemes emerged over a century ago.

Plenty of talent - not so much integrity

In May, following a guilty plea, two British businessmen, each began a custodial sentence. Liam Collins was a former star of ITV’s Britain’s Got Talent. A skillful dancer he may have been but neither he nor his colleague, David Bone, were able to shimmy their way out of a 21-month gaol sentence. Their crime was a classic example of the notorious Ponzi schemes, made famous by the notorious Charles Ponzi in the early part of the 20th century.

What is a Ponzi scheme?

New investors are promised high returns. At first, profits are high and new investors are attracted. The money from the new investors is then used to pay dividends to the original investors.

For as long as there’s a stream of new investors, all seems fine.

But, in the end, new investors dry up and the scheme collapses. The only winner is the man at the top of the investment pyramid.

£3 million owed to investors

In the case of Collins and Bone, these two had secured funds from investors to buy and renovate student housing. In 2009, their business went into liquidation owing over £3 million to their investors. The pair gave promissory notes promising, in a number of years, to pay back the unfortunate investors with interest.

They then set up a company to attract fresh investors to an identical enterprise – buying and re-furbishing student accommodation.

Both solicitors and financial regulators warned the pair of the illegality of their scheme – a warning that they ignored. The regulators also advised the Collins and Bone to warn their investors that, if anything were to go amiss, there would be no reimbursement.

Collins and Bone promised to stop accepting new investments and to warn their investors of the true position. The pair reneged on both promises.

Robbing Peter to pay Paul

Between May 2010 and April 2011, they attracted around £274,000 from new investors, promising exaggerated interest payments and guarantees that the investments were safe. They used these funds to partly pay off their original investors and partly to finance a lavish lifestyle.

The court’s imposition of a custodial sentence is a clear demonstration of the authorities’ determination to deter this kind of scam.

How can I tell if I’m being approached by Ponzi-style scammers?

Watch out for

– Guaranteed high returns, but with minimal or no risk (this simply never happens).
– High-pressure selling, typically forcing you into making quick decisions.
– Use of investment jargon, designed to impress.
– Requests to keep your investment a secret.
– Exotic websites and brochures.

Just remember that famous old adage –
If it sounds too good to be true, it probably is.

Will I get my money back?

With online bank fraud, there’s a chance you’ll get your money back, especially where it can be shown that you were not at fault. Unfortunately, with Ponzi schemes, the news isn’t so good. Because you willingly handed your money over, the authorities will not be especially sympathetic.

If you are growing suspicious that you’ve invested in a Ponzi scheme, then
1. Cease all contact with the fraudsters and don’t send any more money.
2. Let your bank know, so they can flag any suspicious activity.
3. Keep all written and electronic communications with the fraudsters
4. contact Action Fraud on 0300 500 5000 – immediately.

Here to help

If you’re in any doubt about people who are approaching you for investment, then please ask us. We despise fraud and will be happy to look into the validity of the people trying to tempt you to part with your hard-earned money. Remember – we’re here to help.

Disclaimer

This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.

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