Finra Alerts Ponzi Schemes

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Spotting HYIP Scams

Any time an investment purports to provide guaranteed above-market returns with no risk whatsoever—especially if you cannot tell how the investment makes money—you should hear warning bells sounding. HYIP sites often display multiple telltale signs of fraud, including:

  1. High, unsustainable yields. Investment return is usually stated as a daily rate of return, often with cryptic "short-term" and "long-term" payout options. For example, the Genius Fund HYIP at one time promised 36 to 40 percent daily, with 2-day yields of 106 percent. In contrast, the Pathway to Prosperity scheme offered investors a choice of 7-, 15-, 30- and 60-day "plans" paying annual rates of return as high as 17,000 percent! Regardless of how the yield is presented, keep in mind that returns on investments in large-company stocks have historically averaged less than 10 percent per year.
  2. Unclear methodology for achieving returns. HYIP sites often give virtually no clues to how the promised returns will be generated beyond generic references to trading in foreign currencies, futures or other investments.
  3. Lack of concrete information about the HYIP operator. HYIP operators cloak themselves in secrecy regarding who manages investor money, where the company is located or where to go to get additional information.
  4. Off-shore operations. Many HYIP sites are located outside the U.S. and typically are not licensed to sell securities in any country, let alone here. Be aware that generally persons or firms offering securities to U.S. residents must be licensed by FINRA and registered with the SEC.
  5. Reliance on e-currency sites. Virtually all HYIP sites require you to open an "e-currency" account from one of a number of online vendors that service the HYIP market. Be aware that while there is currently no federal regulation of e-currency sites, many states require "money transmitters" to register with the state’s banking regulator. An unlicensed e-currency site is a red flag.
  6. Incentives to recruit new investors. Many HYIP ploys dangle the prospect of paying a "referral bonus"—as high as 25 percent—to those who bring in new investors with fresh streams of money. Remember that Ponzi schemes tend to collapse when the fraudster at the hub can no longer attract new investors, so perhaps it’s no surprise that HYIPs encourage participants to rope in new recruits to help keep the scheme afloat.