A Ponzi scheme is a kind of investment fraud in which earlier investors get returns using money obtained from later ones. In a typical Ponzi scheme, the fraudster promises investors a high rate of return with no risk. Ponzi schemes inevitably fail when the influx of new investors ceases and there is insufficient money to go around.

Property Can Act as a ‘Hook’

Naturally, Ponzi scheme operators want a ‘hook’ in order to attract investors. Investors are enticed by what seems to be a ‘genuine’ investment opportunity. The fraudsters then provide exaggerated estimates, make plain misleading statements, and make promises of above-market returns in order to inflate the value of their investment. Numerous Ponzi schemes use real estate as a bait.

Real estate seems to be a great investment. However, like with everything else, a real estate investment opportunity may just be a fraud in the wrong hands. If you feel you have been a victim of a Ponzi scam, you should immediately contact an expert Ponzi scheme attorney to explore your legal options.

Five Red Flags of Real Estate Ponzi Schemes

Real estate Ponzi schemes may be quite complex in certain instances. As a result, even the experienced eye may have difficulty recognizing the scam for what it is. Whenever you invest your money, you should do extensive due diligence on the person or business presenting the investment opportunity.

Conducting research is the most effective strategy to protect yourself and identify scammers. Five crucial warning signals that an investment proposition may be a Ponzi scam are as follows:

1. Returns guaranteed:

Nothing in life is definite, most notably investing in real estate. If an investment is being presented to you as a ‘sure thing,’ you should be highly suspicious. You want to invest with someone who is candid about the hazards associated with real estate investment.

2. Returns that are consistent:

In a similar vein, real estate profits are seldom, if ever, constant. If you come across a real estate investment option that guarantees continuous, above-market profits, you should walk away.

3. Access to information is difficult:

When you want information on your investment, you should be able to get it without difficulty. If you begin to hear excuses, discover missing papers, or are informed that investing techniques are ‘secret,’ red flags should go up.

4. Constraints on reinvestment:

A strong opportunity investment, on some way, sells itself. Excessive pressure to reinvest earnings, or to invest at all, indicates a problem. If the pressure becomes too great, you should exit and seek another investment.

5. Something feels ‘wrong’:

Finally, in certain circumstances, investment fraud victims are aware that something is wrong but are unable to express precisely why. This is quite natural. If you get an uneasy feeling about anything, walk away; it is always better to be safe than sorry.

The Ponzi Scheme’s History

The term “Ponzi Scheme” was coined in 1919 in honor of Charles Ponzi, despite the fact that this sort of scheme dates all the way back to the 1860s. Charles Ponzi’s plan included the United States Postal Service. He began lawfully, selling “international reply coupons” at post offices, allowing senders to pre-purchase postage for their letters. The letter’s receiver would then be able to swap the coupons for postage and respond.

The concept was so effective that he attracted a large number of investors quickly. Soon, however, Ponzi started diverting investors’ funds into payments to himself and previous investors, referring to this as “profit,” until the whole scam finally crashed. Ponzi was caught and charged with mail fraud shortly afterwards. This was such an infamous occurrence in America that it inspired the name of an entire kind of scheme.

A Modern-Day Example

Bernie Madoff was found guilty of Ponzi scheme fraud in 2008. Madoff faked trade records at the time to conceal investment income. Madoff was luring new investors with his fabricated figures and then using that money to repay previous investors who believed they were receiving a part of profits – earnings that never materialized. The money eventually ran out, and Madoff was caught. He was executed in April 2021.

A Ponzi Scheme’s Characteristics

The majority of Ponzi schemes have the following characteristics to be on the lookout for:

• Promises of huge profits with little risk
• Consistent returns regardless of market conditions
• Secret investments
• “Complex” or “difficult to explain” investments
• Unregistered securities with the Securities and Exchange Commission (SEC)
• Discreet or intricate investing techniques
• A lack of formal documentation for the investments or difficulties with the documentation
• Difficulty withdrawing funds from an investment
• Unlicensed merchants

If you ever come across an investment offer that exhibits any of these traits, consider it a red flag and likely evidence of a Ponzi scam.

Commercial Real Estate Ponzi Schemes

Ponzi schemes are prevalent in practically every business, including commercial real estate. Gerson Barkany pled convicted in 2018 to orchestrating a real estate scam that deceived investors of $62 million.

Barkany offered more than ten individuals “risk-free” investments in commercial real estate, urging them to acquire and quickly sell the property at a profit. However, such transactions did not occur, since Barkany forged real estate paperwork and agreements.

When investors provided funds for a commercial real estate venture, Barkany retained a portion and utilized the remainder to repay previous investors – a critical aspect of such a scheme. However, Barkany eventually ran out of funds, and the Ponzi scheme imploded, leaving investors with nothing.

These types of scams are widespread, and it’s critical to watch for warning signs — in this instance, the promise of a “risk-free” investment.

Conclusion

Real estate Ponzi schemes might look like an attractive investment in the beginning but it’s a scheme that inevitably leads to the loss of investors. If you fear you are a victim of such fraud or any other form of investor fraud, don’t hesitate to contact us at the Frankowski Firm by calling us at (888) 741-7503.