5 Signs Your Surefire Hedge Fund Investment Is A Ponzi Scheme

Jan 2 2015 | 6:25am ET

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, better known as Charles Ponzi, was an Italian con artist who gave his name to a type of fraud still prevalent today: the Ponzi scheme.

The U.S. Securities and Exchange Commission defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” State and federal financial regulators in the United States uncover a new Ponzi scheme nearly every week.

On the sixth anniversary of the collapse of the granddaddy of all Ponzi schemes—the Bernard Madoff affair—we thought it might be timely to consider some of the warning signs that an investment might not be all it's cracked up to be.

We asked David Kotz, the former SEC Inspector General and author of Why Ponzi Schemes Work and How to Protect Yourself from Being Defrauded for some red flags to watch for when evaluating an investment (and we did a little research of our own to provide some real-life examples).

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