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Ponzi Schemes call the Division at (801) 530-6600
Due Diligence

Since Ponzi schemes typically occur in private securities transactions, the burden is on the investor to ensure their investment is legitimate. To assist you in performing the due diligence so that you do not invest in a Ponzi scheme, you may contact the Division’s Licensing Section or use the Division’s online resources.

Key Questions to Ask the Issuer, Promoter, or Salesperson Before Investing

  • What type of security is being offered?  Companies raise capital through debt or equity financing. You may be issued an equity interest (e.g. partnership interest, stock, or interest in a limited liability company) for your investment and may receive dividends or a share of profits. Your investment may also be a loan, or debt, to the company (e.g. promissory note, bond) that is to be repaid according to certain terms that may include payments of interest. Debt may also be secured or unsecured.
  • Is the security properly registered with the Utah Division of Securities or federal government?  If the company is properly registered, you should be able to find the company in the Division's online database or the S.E.C.'s Edgar database. If the company says it is exempt, they should be able to provide you with a legal citation of the law that they are relying upon for exemption. If they cannot, the security is likely illegitimate and you should not invest.
  • Does the company provide a disclosure document, like a Private Placement Memorandum?  To help you perform the proper due diligence before investing, you should be provided a private placement memorandum, private offering memorandum, or some other document that fully details information about the fund, including: its managers, its financials, its track record, its investment strategy or business plan, and the risks associated with that strategy or plan. Like a mutual fund’s prospectus, a hedge fund’s disclosure document should be substantial in length (typically 30 to 60 pages).
  • Does the company provide audited financials?  Generally, audited financials are reviewed to assess the financial status of the company, including outstanding liabilities.
  • Will the managers use the monies to invest in other companies or securities? If so, what types of investments with the fund manager make?  With pooled investor dollars, the managers of the company may invest in many types of investments each of which carry their own particular risks. If the company will make investments with investor dollars, it is acting as an investment fund and the fund manager needs to license as an investment adviser. Additionally, the fund should disclose in writing the types of investments it will make and the risks associated with those investments. If the fund cannot or will not disclose what types of investments it will make with your money, you should not invest.
  • If the managers use the monies to invest in other companies or securities, are the fund managers licensed as an investment adviser?  Fund managers are required to license as investment advisers in most instances. To verify whether the fund manager is licensed, please contact the Utah Division of Securities of use the Verify a License tool.
  • Does the company’s business plan (or the fund’s investment strategy) make sense?  If you cannot understand how the company (or investment fund) is supposed to earn money, do not be surprised if you lose your money. Some business plans and investment strategies may be complicated, but they should ultimately make sense. Some fund managers may say their business plan or investment strategy is proprietary, but that shouldn’t apply to the overall business strategy, which should be disclosed in writing.
  • Does the fund’s history of returns seem to be too good to be true?  The risk/reward principal dictates that the higher the return, the greater risk. Historically, a good rate of return is 7-8 percent per year (above inflation), but some hedge funds boast rates of return as high as 10 percent per month. While such returns are suspect on face, even if they were accurate, they would reflect serious risks. In short, if it’s too good to be true, it probably is.
  • What experience do the managers have?  Every industry has its specific challenges, so the question is not only whether the business plan or investment strategy is solid, but also whether the managers have the expertise and skill to execute the plan or strategy. While experience is not a requirement, it is definitely something to consider. The experience of all principals of the company (or investment fund) should be fully detailed in the disclosure document and you should contact the Utah Division of Securities for further information.
  • Have you researched the company and managers?  Before investing you should research the company and its management. The first step may be a simple search on google.com or bing.com to find any information, but you should contact the Utah Division of Securities to see if the company or its managers have any derogatory information. You may also use the Division's resource tool Check Out An Investment Opportunity. You may also search with other regulators, such as real estate or insurance. Greater due diligence may require looking for any court records for criminal or civil matters.
Key Question to Ask Yourself Before Investing
  • Is this investment too good to be true?
  • Do I understand the investment?
  • Why does the company need my money?
  • Can I afford to lose my investment?
  • Have I spent sufficient time researching the company and its managers?
About Charles Ponzi

Charles Ponzi was an Italian-born con man. In 1920, Ponzi became infamous for defrauding New Jersey and New England citizens out of millions of dollars. Ponzi promised investors at least 40 percent return in 90 days on their investment that he claimed would be used to purchase discounted International Postal Reply Coupons. He said the coupons could be exchanged for stamps in the United States and the stamps could be sold at a substantial profit. Early investors were paid as promised and the news of Ponzi’s investment spread quickly, creating a seemingly endless stream of investors. Ponzi’s scheme was exposed by a Boston newspaper and law enforcement. The investigation revealed Ponzi made no real effort to purchase postal reply coupons. Ponzi was charged with mail fraud and was in and out of prison several times before being deported. Ponzi died in 1949, destitute.

What is a Ponzi Scheme?

A Ponzi scheme is a fraud designed to give investors the impression that an investment is profitable. In a Ponzi scheme, the fraudster pays early investors with money that is thought to be profits from the business, but is actually money from their own principal investment dollars or the pooled investment dollars of subsequent investors. As new investment dollars are paid out to previous investors, the fraudster seeks more investors to fund the “payments” being made.

Sometimes Ponzi schemes are perpetrated to cover business or investment losses, but sometimes Ponzi schemes are perpetrated to cover the misuse or theft of investor funds. Either way, Ponzi schemes constitute securities fraud under the Utah Uniform Securities Act and federal securities laws.

ALL Ponzi Schemes Collapse

Since Ponzi schemes need an ever-increasing supply of new investors to maintain payments to prior investors (and possibly support the fraudster’s life-style), all Ponzi schemes ultimately collapse as the fraudster will eventually fail to find enough new investors to cover the payments to all prior investors.

Once the Ponzi scheme has collapsed, recovering funds can be extremely difficult—especially if all the funds were paid out to earlier investors.

Utah Ponzi Schemes

While large Ponzi schemes have made the news in recent years (e.g. Madoff, Stanford, Petters), Utah sees its own share of smaller Ponzi schemes.

Often these Ponzi schemes are sold under the guise of a seemingly profitable business. Some common business ventures that have been found to be Ponzi schemes include:

  • "Flipping" distressed homes
  • Payday loan companies
  • Hard money lending
  • Factoring of accounts receivable
  • Developing properties
  • Forex trading
  • Purchasing viaticals
  • Removing soil contaminates

This is not to say that all these businesses are inherently Ponzi schemes, but any business raising money and making payments to investors could be running a Ponzi scheme. To ensure that you do not invest in a Ponzi scheme, you should investigate any investment opportunity before investing. You can use the Division’s online tools to help you Check Out An Investment Opportunity.

Another common characteristic of Utah Ponzi schemes is the use of Affinity Fraud to lure investors. Affinity fraud is when someone abuses the membership or association with an identifiable group (e.g. religions, ethnicities, professions) for the purpose of building trust in the legitimacy of the investment. The blind trust created by affinity fraud prevents investors from asking the basic questions about the investment opportunity and the company or individual offering the investment.

Other Concerns

Registration Concerns

Any person or company that seeks to pool investor money has created a security and must be:

  1. properly registered under Utah law;
  2. exempt from registration under Utah law; or
  3. be a federal covered security notice filed in Utah.

In most cases, promoters running Ponzi schemes fail to properly follow securities laws and offer unregistered securities to Utah investors, which is a violation of the law.

Licensing Concerns

If the underlying business of the offering is an investment fund whereby a fund manager makes investment decisions with the pooled monies, the manager is often required to license as an investment adviser. When a fund manager licenses as an investment adviser, the Division often has additional information that it can offer to prospective investors seeking to research the fund. Licensing as an investment adviser also ensures that the manager’s fees will not exceed industry standards without proper disclosure.

Additionally, if a third party is compensated for introducing the issuer and investor, that third party needs to be licensed as an issuer-agent, broker-dealer agent, or investment adviser representative depending on the specific arrangements.