August 31, 2010

FINRA Alert: High-Yield Investment Programs Tied to Ponzi Schemes

Attracted by promises of high returns? Think Madoff

Social media--including Facebook, Twitter and YouTube--and a wide variety of Web sites have become the favored marketplace for high-yield investment programs (HYIPs), which entice investors with promises of safety together with high rates of return--20%, 30%, 100% per day, according to a new investor alert posted on the Financial Authority Regulatory Authority (FINRA)'s Web site.

HYIPs are unregistered investments created and promoted by unlicensed individuals, offering unsustainable rates of return through use of suspect trading strategies, FINRA says. Many operate as Ponzi schemes. The alert says some Web sites purport to monitor and rank programs they consider best, while others promote the products in various ways, even legally suspect ones. Still others, not to be outdone for cynicism, promote specific HYIPs by warning potential investors to avoid HYIP scams.

"But the reality is virtually every HYIP we have seen bears hallmarks of fraud," the alert says. "We are issuing this alert to warn investors worldwide to stay away from HYIPs."

For investors unfortunate enough to have put money in a HYIP, the alert recommends that they not send more money, not refer others to HYIPs and not try to "ride the Ponzi" in the hope of getting in and out before it implodes.

The plethora of HYIP Web sites trying to attract investors' attention--"a bizarre substratum of the Internet," in the words of the alert--"are designed to lend legitimacy to a high-risk scheme by creating the illusion of a real market, complete with real investors, real investments and real demand."

The alert says HYIP sites often give themselves away with telltale signs of fraud that should put investors on guard. These include the following:

  • High, unsustainable yields
  • Unclear methodology for achieving returns
  • Lack of concrete information about the HYIP operator
  • Offshore operations
  • Reliance on e-currency sites
  • Incentives to recruit new investors

In addition, the alert says, Web site copy or e-mail messages riddled with typos and poor grammar are often good indications that scammers are at work.

The alert ends with some commonsense suggestions for investors to protect themselves: ask and check; exercise skepticism; recognize persuasion at work. Obvious, perhaps, but many a Madoff investor probably wishes he or she had done these things.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.

Reprints Discuss this story
This is where the comments go.