An Introduction To HYIPs: Ordinary Ponzi Schemes Dressed Up For A Web 2.0 World

INRA (the Financial Industry Regulatory Authority) recently issued an alert to investors regarding a sophisticated, social media-linked based fraud. Those Ponzi schemes are called High Yield Investment Programs (HYIPs), and they are growing rapidly worldwide on the Internet. Recently, for example, the so-called Pathway to Prosperity exposed 40,000 investors in over 120 countries to $70 million in losses. Let's examine the scam.

HYIPs remarkably promise both safety and extraordinarily high returns on investments (20% or more per day) through "murky trading strategies", according to FINRA. In many of the schemes, participants both invest and then become paid recruiters of other individuals to invest. The use of Internet social media is integral to the scheme. The fraudsters appear on YouTube, Facebook and other social media sites "to lure investors, fabricating a 'buzz' and creating the illusion of social consensus."

FINRA cautions investors to stay away. For investors who unfortunately already have been duped by a HYIP, FINRA warns them not to send more money, even if the program appears to be paying "interest". In addition to warning not to refer others to the HYIP, FINRA also warns them not to "ride the Ponzi", by attempting to get in and get out before the scheme collapses. As FINRA puts it, "If you do, you could end up like investors in the Genius Fund, a HYIP that regulators shut down but not before participants lost $400 million!"

Amazingly, in addition to the "hundreds" of fraudulent HYIP websites that exist today, there is "a bizarre substratum of the Internet" with websites that promote HYIPs and profit in their own way. FINRA's alert details, for example, websites that rank the latest HYIP programs! Those websites provide details of "payout options", the purpose of which is "presumably to lend credibility to the HYIP 'markets' and to falsely suggest that those HYIPs at the top of the list are worthwhile investments."

Likewise, there are blog, chat and "teach" websites. There some HYIP "investors" (disguised fraudsters in actuality) proffer strategies for maximizing profits and avoiding losses. One even can find online videos and eBooks! Topics include how to "build a winning HYIP portfolio" and even how to "ride the Ponzi."

Finally, HYIPs offer e-gold and other online payment systems. Those systems facilitate funding a participant's account, and allow the "return" on the "investment" to be deposited easily. Of course, only the scammer is enriched.

FINRA's alert provides 6 tips to investors to identify HYIP scams. First, be wary of high, unsustainable yields. FINRA reports that HYIPs usually state investment returns as daily rate of returns. Usually, HYIPs use cryptic language such as "short term" and "long term" payout options. FINRA warns that regardless of how presented, keep in mind that the historical returns on investments in large company stocks has averaged less than 10 percent per year.

Second, investors must beware of the "unclear methodology for achieving returns". According to FINRA, HYIPs "give virtually no clues to how the promised returns will be generated beyond generic references to trading in foreign currencies, futures of other investments."

Third, FINRA warns that investors never are presented with concrete information regarding the HYIP operator. HYIPs "cloak themselves in secrecy regarding who manages the investor money, where the company is located or where to go to get additional information", reports FINRA.

Fourth, many HYIP sites are located outside of the United States. They typically are not licensed to sell securities in any country, and certainly not in the United States, observes FINRA. FINRA cautions that any person or firm offering securities to U.S. residents must be licensed to do so by FINRA and must be registered with the SEC.

Fifth, beware that virtually all HYIP websites require participants to open an "e-currency" account. Those accounts are offered through online vendors that service the HYIP market. FINRA warns that an unlicensed e-currency site is a red flag.

Sixth, be wary when there are incentives to recruit new investors. FINRA states that, "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." That tactic normally serves no other purpose than to help keep the Ponzi scheme afloat.

In conclusion, the frauds are advancing with the times. Web 2.0 dressed Ponzi schemes still are, at the end of the day, Ponzi schemes. Avoid them!

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.