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“Buy immediately” and get a “free meal” with that Ponzi scheme

If you are an adviser who sold these investments without knowledge that they were unlawful, or have received a notice from regulators, take steps to protect yourself and your retail clients.

By Paul Vorndran

The warnings issued by the SEC to investors about Ponzi schemes that prey on senior investors in 2018 remain true today and bears repeating, not only for investors but for the advisors that sell alternative investments.

The SEC advises investors to check for these classic warning signs of a Ponzi scheme:

• Promises of High Returns with Little or No Risk. Guaranteed high investment returns are the hallmark of a Ponzi scheme. 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.

• Unlicensed and Unregistered Sellers. Most Ponzi schemes involve individuals or firms that are not licensed or registered. Even if an investment professional comes across as likable or trustworthy, use the free search tool on Investor.gov to check whether the person is licensed and registered.

• Overly Consistent Returns. Investment values tend to fluctuate over time. Be skeptical of an investment that is said to generate steady positive returns regardless of market conditions.

In a Ponzi scheme, the SEC explains that fraudsters use money collected from new investors to pay prior investors. What appears to be a return on your investment is actually money from a swindled investor. Take your time deciding whether an investment is right for you and don’t give any money until you have confirmed for yourself that the seller is licensed and registered.

The SEC has brought enforcement actions involving Ponzi schemes aimed at seniors, including:

• In the Lifepay Group, LLC matter, two defendants conducted an alleged Ponzi scheme that targeted seniors and their retirement savings. The SEC alleges that these defendants offered investors unregistered promissory notes, telling them that their money would be used for real estate investments that would generate high returns. To keep the Lifepay scam going, these defendants allegedly used new investors’ money to pay earlier investors and convinced investors to rollover their investments into new promissory notes for larger amounts. According to the complaint, these defendants only invested a small portion of investors’ money in real estate and stole roughly $1.3 million to pay for personal expenses.

 

• In the Woodbridge matter, the defendants allegedly conducted a $1.2 billion Ponzi scheme in which thousands of people invested their retirement savings. The SEC alleges that the defendants employed hundreds of sales agents to advertise through television, radio, newspaper, cold calls, social media, websites, seminars, and in-person presentations. According to the complaint, although the defendants claimed that investors would get paid revenue from high-interest loans to third parties, the defendants, in reality, used money from new investors to pay returns owed to existing investors. One defendant allegedly used $21 million of investors’ money for his own extravagant personal expenditures.

The SEC asks that if you know someone who has been pitched an investment with any of these red flags, report it to the SEC.

If you are an adviser who sold these investments without knowledge that they were unlawful, or have received a notice from regulators, take steps to protect yourself and your retail clients.

Paul Vorndran, Esq., has represented the Colorado Securities and Insurance Commissioners and brought enforcement actions against both promoters and non-securities licensed, independent insurance agents. Now he works the other side, advising and defending licensed insurance agents and investors. He can be reached at pvorndran@joneskeller.com or 303.573.1600.

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This communication is provided for your information only and is not intended to constitute legal advice or legal opinion as to any situation. You should not take, or refrain from taking, any action based on information in this article, without seeking legal counsel from an attorney on your particular facts and circumstances. Jones & Keller would be happy to provide you with specific advice about specific situations, if desired. Do not hesitate to contact us.

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