Ponzi schemes, explained- Why investors keep falling for scams
Ironically, it is just the kind of juicy swindler story you might binge watch on those platforms- Horwitz, a 35-year-old actor who had bit roles in a handful of low-budget films over the past decade, pleaded guilty last fall to committing federal securities fraud and running an illegal operation known as a Ponzi scheme. For years, prosecutors say, Horwitz used his investors’ money to fund a lavish Hollywood lifestyle — until his scam unraveled.
In short, a Ponzi scheme is a type of financial fraud that uses money from new investors to pay off earlier ones.
Although Ponzi schemes have a long history, they are far from a bygone threat, experts say. In fact, they remain a major risk to investors in an era of soaring stock markets and wild surges in newfangled assets like NFTs and cryptocurrency.
Horwitz’s case appears to check the major boxes for a Ponzi scheme- They’re typically perpetrated by (a) men who (b) promise steadily high returns with minimal risk and (c) often prey on friends and family to get the scam off the ground.
Early investors in a Ponzi scheme get rewarded with mindbogglingly large dividends — Horwitz allegedly promised returns between 25% and 45% — that propel them to tell others about the golden opportunity, which keeps new money flowing into the scam. Once the pool of new investment dries up, of course, the fraud falls apart.
A fraud is born
“But, as his victims came to learn, [Horwitz] was not a successful businessman or Hollywood insider,” prosecutors said. “He just played one in real life.”
(Savage burn, prosecutors.)
Horwitz’s company “neither acquired film rights nor entered into any distribution agreements with HBO or Netflix” and he provided fake documents to his investors. HBO, like CNN, is part of WarnerMedia.
Horwitz instead routed the funds to his own accounts, shelling out $5.7 million on a house and splurging on trips to Vegas on private jets, according to a complaint filed by the Securities and Exchange Commission.
It’s not hard to imagine how an investor might be sucked into such a scam in the era of meme stock rallies and overnight cryptocurrency millionaires. The fear of missing out is a powerful tool for grifters.
Phelps, who wrote “The Ponzi Book- A Legal Resource for Unraveling Ponzi Schemes,” says people often rely too much on word of mouth without due diligence to determine whether an investment is legitimate. That can be especially true when it comes to schemes involving cryptocurrencies or artificial intelligence.
“All it takes is for somebody to represent that they have the proprietary algorithm that guarantees returns and that sounds pretty technical and fancy and like a sure thing,” she said. “That feels comfortable to people because somebody knows technically what they’re talking about, supposedly, and the outcome is a guaranteed return that’s much higher than something they’re going to find somewhere else.”
Even professional investors can fall victim to fraud, Phelps notes, but there are several ways to avoid getting taken for a ride. Step one is simply being mindful of the potential for fraud. “I’m not even sure if that crosses people’s minds at all,” she said. Beyond that, investors need to ask due diligence questions, beware of promises of guaranteed return with no risk and watch out for returns that are higher than what you’re likely to find in the marketplace.
“If you can’t really understand what the investment is after a five-minute explanation,” Phelps says, “you probably shouldn’t be investing in it.”
(News Source -Except for the headline, this story has not been edited by Times Of Nation staff and is published from a www.cnn.com feed.)
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