Know the Law: Identifying Fraudulent Investments

May 23, 2016

Published in the Union Leader (5/23/2016)

Q. What is a Ponzi scheme and how do I identify one?

A.  A Ponzi scheme is a fraudulent investment scheme that involves the payment of investment returns to existing investors that are actually not investment returns and are from funds contributed by new investors. Most Ponzi schemes do not involve legitimate business activity.  Instead the promotors focus on obtaining new money to make payments to earlier investors as they also divert funds for personal use.  Some Ponzi schemes do involve legitimate business activity, at least initially, which often makes them harder to detect.

There are a number of characteristics that often appear in connection with Ponzi schemes and they should serve as potential red flags to investors when considering an investment:

  • Guaranteed or high returns with little or no risk. All investments involve risk and investments yielding high returns typically involve greater risk.
  • Consistent returns regardless of market conditions. Investments typically fluctuate overtime.  Investors should question promises of regular, positive returns.
  • Unregistered investment offerings.  Ponzi schemes usually involve offerings that have not been registered with the SEC or state securities regulators. Unregistered offerings provide significantly less disclosure of key information related to the company, but investors should still receive information about the company’s management, products or services, financials, and risks of investment.  
  • Low minimum investor qualifications. Most legitimate unregistered, private offerings require that investors qualify as “accredited investors,” so promotors of most legitimate offerings should ask about the salary or net worth of its investors.
  • Unlicensed sellers.  Individuals and firms that offer and sell securities generally must be registered or fall within an exemption from registration under federal or state securities law.  Due diligence of the investment professionals presenting the investment should be conducted.
  • Complex investment structures.  You should always avoid investments that you do not understand.
  • Issues with investment documents.  Investors should carefully review disclosure documents before investing.  Unrealistic claims about the safety of the investment, future profitability, or investment returns are red flags.  A lack of disclosure documents or errors and inconsistencies on account statements may also be a sign of fraud.
  • Difficulty receiving payments.  Difficulty receiving payment or pressure to roll-over or convert investments for higher returns are often a sign of trouble.
  • Shared relationships or affinity. Investors should be suspicious of investment opportunities that appeal to certain groups of friends, colleagues, or organizations as a basis for credibility and trust.


As with many frauds, Ponzi schemes often induce investors with new or cutting-edge products or industries with a promise or likelihood of high returns.  Investors should conduct extensive due diligence of investment opportunities and seek the advice of an unbiased, third party professional such as a registered investment adviser, attorney, or accountant for a second opinion.  More information on Ponzi schemes is available on the SEC’s website ( from which some of the information in this article was derived.

Julie Morse can be reached at

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association.   We invite your questions of business law.  Questions and ideas for future columns should be addressed to:  McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to  Know the Law provides general legal information, not legal advice.  We recommend that you consult a lawyer for guidance specific to your particular situation.