Punked for Profit: Beware of Social Media-Linked Ponzi Schemes

A man wearing a mask of Bernie Madoff, the most famous Ponzi schemer.
A man wearing a mask of Bernie Madoff, the most famous Ponzi schemer.

There's no such thing as a legitimate high-yield investment program, period. U.S. regulators recently issued an investor alert about Internet-based Ponzi schemes that purport to offer returns of 20%, 30%, 100% or more per day -- yes, that's per day.

"These are unregistered investments sold by unlicensed individuals, both typically violations of the federal securities laws," says John Gannon, senior vice president for investor education at the Financial Industry Regulatory Authority. Yet, that doesn't mean somebody won't try to tell you an HYIP is the ticket to the good life.

The con artists behind high-yield investment programs are experts at using social media such as YouTube, Twitter and Facebook to lure investors and create the illusion of social consensus that these investments are legitimate, and that everyone is investing in them.

Highly Ranked Scams Are Still Scams

Some sites purport to monitor and rank the "best" programs. Others tout "winning" high-yield strategies or provide a forum for trading tips on how to profit from high-yield investment programs, even those suspected to be scams. Some expressly caution investors against HYIP scams, using a form of reverse psychology to create the false impression that this high-yield investment opportunity is somehow different. No matter how it's dressed up, investors should know that HYIPs are Internet-based scams, according to FINRA. Virtually every high-yield investment program bears the hallmark of fraud.

The problem is growing. In fiscal 2009, the Federal Bureau of Investigation had a 105% increase in new High-Yield Investment Fraud investigations compared to fiscal 2008 (314, compared to 154), many with losses exceeding $100 million.

What's driving the escalation? "We don't know definitively what is driving the increase in HYIPs, but people tend to look for investment alternatives when yields on bonds and bank deposits are low and the stock market is relatively volatile," explains FINRA's Gannon.

With the Internet, con artists have worldwide reach. The Pathway to Prosperity scheme allegedly defrauded more than 40,000 investors in over 200 countries of $70 million. According to the U.S. Attorney for the Southern District of Illinois, The Pathway to Prosperity website claimed that investors could earn extremely high rates of return with minimal or no risk. According to the complaint, investors were offered their choice of seven-, 15-, 30- and 60-day "plans."

Unheard-of Interest Rates

At the daily interest rates promised, a seven-day plan supposedly produced an annual return of 546%, and a 60-day plan supposedly returned 720% profit on an annual basis, with equally spectacular rates of return for 15-day and 30-day plans. If an investor reinvested both his original money and the supposed earnings that Pathway to Prosperity promised on a seven-day program, for instance, at the daily interest rate quoted the annual return would have been approximately 17,000%.

Such rates of return are unheard of, so who would fall for such a promise? Plenty of people, apparently.

"Con men use multiple persuasion tactics to ensnare victims into making an emotional, rather than a logical decision," explains Gannon. Some of the tactics used with HYIPs include:

  • Phantom riches -- the promise of high returns

  • Source credibility and social proof -- the rating and review sites give credibility to the HYIPs and also indicate that a wide group of people are investing in them

  • Scarcity -- people are urged to get in early before the scam falls apart.

How best to spot a high-yield investment program scam? Anytime an investment purports to provide guaranteed above-market returns with no risk whatsoever, especially if you cannot tell how the investment makes money, run like hell. Some classic red flags are:

  • High, unsustainable yields

  • Unclear methodology for achieving returns

  • Lack of concrete information about the HYIP operator

  • Off-shore operations

  • Reliance on e-currency sites

  • Incentives to recruit new investors.

Just Say No. Please

The best way to avoid losing money is to steer clear of HYIPs. At the very least, ask tough questions and check them out. Always independently verify who you are dealing with and whether the seller of the investment is licensed to do business with you. Confirm the status of an individual broker or firm using FINRA Broker Check. Check with your state banking regulator to confirm whether an e-currency site is registered. You can find contact information on the website of the Conference of State Bank Supervisors.

Second, exercise skepticism. Ask yourself why they're "sharing" their "secrets" with you. Recognize persuasion at work. Rankings and testimonials are tactics that fraudsters use to bolster the credibility of the scam -- but remember, credibility can be faked.

If you already have money in an HYIP, don't sink any more into it, even if you think it will help you get your original investment back. If you suspect you've been punked for profit, you can file a complaint or question using FINRA's online Investor Complaint Center.