Ponzi schemes

Ponzi Schemes and the SEC Whistleblower Program

Ten years have passed since the collapse of Bernard Madoff’s multibillion-dollar Ponzi scheme, which played a major role in prompting Congress to enact a whistleblower program at the Securities and Exchange Commission (“SEC” or “Commission”). Specifically, a whistleblower named Harry Markopolos had attempted to report the Ponzi scheme to the SEC for nearly a decade, however, his warnings were largely ignored. In order to avoid this misstep in the future, the Dodd-Frank Act created the SEC Whistleblower Program to incentivize future whistleblowers with specific, timely, and credible information about federal securities laws violations (e.g., multibillion-dollar Ponzi schemes) to report to the SEC. Since the inception of the program in 2011, the SEC has received more than 40,200 whistleblower tips, some of which have enabled the SEC to order more than $4.8 billion in financial remedies from wrongdoers. In exchange for these valuable tips, the SEC’s Office of the Whistleblower has paid more than $1 billion in awards to whistleblowers to date.

The SEC defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” The fraudsters are able to keep the scheme running only by attracting new money to make promised payments to earlier-stage investors, thereby creating the false appearance that investors are profiting from a legitimate business. The schemes tend to collapse when the fraudsters are unable to recruit new investors or when a large number of investors ask to cash out.

According to the SEC, in the classic Pyramid scheme, “participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”

Whistleblowers Aid the SEC in Identifying and Halting Ponzi Schemes

According to a speech by the former Director of the SEC’s Division of Enforcement, whistleblower tips have greatly aided the SEC in identifying and halting Ponzi schemes. For the past four fiscal years, the SEC Office of the Whistleblower has consistently received a significant number of tips related to offering frauds, such as Ponzi, or Ponzi-like, schemes:

  • Fiscal Year 2016: 15% of whistleblower tips
  • Fiscal Year 2017: 18% of whistleblower tips
  • Fiscal Year 2018: 20% of whistleblower tips
  • Fiscal Year 2019: 13% of whistleblower tips
  • Fiscal Year 2020: 16% of whistleblower tips

As noted in the SEC’s speech, these schemes can be difficult to detect until it is too late. As such, whistleblower tips have proven to be a valuable resource for the SEC in its efforts to combat Ponzi schemes and protect investors, especially retail investors who are often the largest class of victimized investors in these schemes.

Red Flags for Identifying Ponzi Schemes

Ponzi schemes frequently share underlying traits. When seeking to identify a potential Ponzi scheme, whistleblowers should consider the following red flags:

  • Promises of high investment returns with little or no risk;
  • Regular, positive returns regardless of market conditions;
  • Investments that are not registered with the SEC or an appropriate state regulator;
  • Unlicensed individuals or unregistered firms;
  • Secretive or complex strategies for which investors cannot get complete information;
  • Lack of paperwork; inaccessibility to information about an investment in writing; and
  • Difficulty receiving payment; promises of “rolling over” investments and promises for higher returns in the future, on the amount rolled over.

Recently, fraudsters have begun to use promissory note scams to raise money from investors in Ponzi schemes. Also, an SEC investor alert warns of the rise in Ponzi schemes using virtual currencies.

Report a Ponzi Scheme and Earn an SEC Whistleblower Award

To report a Ponzi scheme and qualify for an award under the SEC Whistleblower Program, the SEC requires that whistleblowers or their attorneys report the tip online through the SEC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the SEC Office of the Whistleblower. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.

SEC Targets Ponzi Schemes

The recent increase in whistleblower tips related to Ponzi schemes, combined with the SEC’s focus on protecting retail investors, has led to the SEC bringing charges against several large Ponzi schemes, including:

  • A Ponzi scheme that raised more than $1.2 billion from thousands of retail investors.
  • A Ponzi scheme that raised more than $345 million from over 230 investors across the U.S.
  • A Ponzi scheme that raised more than $102 million from 600 U.S. investors.
  • A Ponzi scheme that raised more than $85 million from at least 150 investors.
  • A Ponzi scheme that raised between $71 million and $129 million from more than 2,150 investors.

In 2019 alone, authorities halted 60 alleged Ponzi schemes that raised more than $3 billion in investor funds.