A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
Ponzi scheme “red flags”
Many Ponzi schemes share common characteristics. Look for these warning signs:
- High returns with little or no risk.Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
- Overly consistent returns.Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
- Unregistered investments.Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
- Unlicensed sellers.Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive, complex strategies.Avoid investments if you don’t understand them or can’t get complete information about them.
- Issues with paperwork.Account statement errors may be a sign that funds are not being invested as promised.
- Difficulty receiving payments.Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
The Market Impact of the SEC’s Conflict Rule
In 2010, Congress passed the Dodd-Frank Act, which directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten.
Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to an emergency humanitarian crisis. Section 1502 of the Act amends the Securities and Exchange Act of 1934 to add Section 13(p).
The Conflict Rule
The final rule applies to a company that uses minerals including tantalum, tin, gold or tungsten if:
- The company files reports with the SEC under the Exchange Act.
- The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.
The final rule requires a company to provide the disclosure on a new form to be filed with the SEC (Form SD).
Measuring the Efficacy of the Regulations
A 2014 Tulane University Law School study investigating the market impact of the conflict minerals rule reveals that each company that filed a Form SD (Special Disclosure Report) invested an average of approximately $546,000 worth of time and effort to comply with the law – largely consisting of in-house corporate time, external human resources, an IT evaluation and IT system expenses. Small issuers spent approximately 1/3rd as much as a large issuer counterpart (small issuer is less than $100 million in revenue). In the aggregate, companies reportedly incurred a total of approximately $710 million to establish conflict minerals programs to furnish the required information by the law’s June 2, 2014 deadline.
As noted by the folks over at Corporatecounsel.net, companies that participated in the survey most frequently cited these reservations about the rule:
– The law renders affected companies less competitive due to the heavy cost burden
– It is unlikely the desired impact is being achieved in the Democratic Republic of the Congo
– The law is unfair in that it is trying to fight a war in the business world with only public companies
– The SEC is not intended as a regulator of social responsibility
FINRA Offers Advice for Investors
While most Americans understand the importance of saving and investing, many do not possess the basic financial knowledge needed to make sound financial decisions, according to a recent study released by the FINRA Investor Education Foundation (FINRA Foundation).
A series of financial literacy questions in the FINRA Foundation’s 2016 National Financial Capability Study revealed that more than half of all Americans surveyed, 54 percent, could not tell which was riskier—investing in a single stock or investing in a mutual fund.
As part of its ongoing investor-education efforts, FINRA has issued an Investor Alert to help investors understand the different types of orders that can be used when making a trade. In general, understanding order types can help investors prioritize their needs, manage risk, speed execution and provide price improvement. Knowing how various orders work and the risks associated with them can be particularly useful at a time when economic and political events domestically and abroad can lead to increased market volatility.
“Understanding the benefits and risks of various types of orders can help investors avoid unintended losses and better ensure trades are executed in a timely manner and at a price with which the investor is comfortable,” said Gerri Walsh, Senior Vice President of FINRA’s Office of Investor Education. “Knowledge is key in helping investors make careful choices to best fit their financial needs and goals.”
The Alert explains that investors have the power to exercise some control over price and timing by choosing the type of order placed. It describes the three main categories of order types: market orders, limit orders and stop orders, and the different forms these orders can take when enhanced with time restrictions and other conditions. The Alert also provides tips on the risks involved with different types of orders. For example, the Alert cautions that stop orders, once triggered, become market orders so, during volatile market conditions, these orders may be executed at prices significantly above or below the “stop price” the investor sets. Like other market orders, the order is guaranteed to be executed fully and promptly at the current market price, but the investor may not like the price he or she gets in a fast-moving market.
“You cannot predict when periods of market volatility will hit, so it is often best to decide what is most important to you based on your investment goals and objectives, whether it be price or making a trade at a specified time,” Walsh said.
Free Initial Consultation with a Securities Lawyer
When you need help with FINRA, the SEC, or other securities issues — like ponzi schemes, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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