Forex HYIP programs - the tell tale signs of a forex scam

High yield investment programs or HYIP is when the con artist and his affiliates defraud investors through promises of return on investment as high as 80 percent per day. These scams have been proliferating in the Western World since the legendary exploits of Mr. Charles Ponzi and his ilk. Usually, the blatantly unrealistic promises of income are reinforced by claims of exclusivity, limited admissions and some kind of secret formula that will allow unlimited profits to investors.

HYIP's are just scam

Of course, these HYIP's are just scams and many investors can consider themselves lucky if they can escape with their jackets still on their backs. While these artists and showmen of deceit convince the prospective investor that the returns are generated through their unparalleled skills at investment, peerless business acumen and stratospheric level of intelligence, in fact the business model is very simple and doesn’t depend on any kind of business acumen or investment insight. All that these industrious individuals do is take the capital which they receive as deposits from gullible new investors and distribute it among the other victims of their schemes, disguising the endless flow of investor funds into their fake investment program as the return on investment generated by shrewd and skillful investment practices.

Why investors get fooled

So what they are doing is taking your money and giving it back to you as yield on their investment programs. Doesn’t it sound insulting to human intelligence that there have been so many people who have been deceived by such an insultingly simple fraud scheme? It probably is, but lack of intelligence certainly isn’t the real cause of the gullibility suffered by the many victims of these schemes. As we mentioned before on this website and you yourself have heard from many others, human beings love to believe what they want to believe. Although logic tells us not to trust in anything which we can’t understand or have explained to us, we are prone to overestimate the value of a promise that offers great returns for just a little exertion.

Managers of HYIP's are mean artists

The managers of HYIPs are intelligent people too. After all they are artists, masters of their craft, who take great delight in destroying the livelihood of innocent people, stealing their life savings and leaving them like fleeced sheep in the middle of the icy landscape of modern life. They know how to addict their clients to the fast returns of the high yield investment programs by moderate, measured injections of the venom. At the first stage, the victims are incredulous of the offers made to them and will join the HYIP with very small sums, for the sole purpose of testing if the managers of the fraud scheme will return anything at all on their investments. Once the small sums deposited come back with a very large profit, the initial insecurity of the victim is also erased, albeit gradually. Slowly and slowly, the small deposits keep building up, as $100s add up to $1,000s and $1,000s to $10,000, until all caution is thrown to the wind and a bout of limitless euphoria incapacitates the reasoning ability of the “investor”. All the while, the managers of the HYIP program keep promoting their beautiful scheme, using the testimonials of past clients to prove the reliability of their impossible claims and if they are successful which in many cases they are, they watch the funds at their disposal balloon to outrageous amounts.

Who are the likely wictims and what happens?

Often the earliest victims of the HYIP are those who are the luckiest, but even that is illusory. As the managers pour the deposits of their victims into a yield pool which they distribute to their older members, those at the top of the pyramid will usually earn the highest amounts due to their seniority in the structure. Those who are the latest usually lose every penny that they deposit, as the scheme collapses and the managers disappear among shades and winds along with client money, leaving hot or cold air on which their victims can build castles.

Of course, while the HYIP pays out well to the earliest victims, they too will regret their gullibility as lawsuits, colloquially known as clawbacks reclaim most of the distributed money as stolen deposits of investors. The managers are winners in Hawaii, Tahiti, the Caribbean Islands or somewhere similar by now, unless caught by law enforcement agencies. Everyone else back at home are losers, their dreams collapsing into a heap of subpoenas, unpaid bills, depression and despair.

Eventually, the manner in which the clients are defrauded will differ from case to case. In some, a pyramid or ponzi scheme will progress as we outlined above, with the number of victims growing through referrals and those at the top getting the highest share of the purported investment income. In other cases, the clients funds are misappropriated through mismanaged managed accounts and in other cases the fraudster doesn’t worry so much about the finesse of his methods, just pockets the deposits and runs away. Often, how they steal is immaterial to the victims but knowledge of their methods could be useful for law enforcement agencies as they attempt to bring the thieves back to justice, with the hope that some of the stolen funds will be regained.

Who was Charles Ponzi and why was he so infamous?

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, better known as Charles Ponzi, was an opportunistic Italian businessman that resorted to swindling the public at large in both Canada and the United States back in the 1920’s. He was born in Italy in 1882, worked in his early years as a postal worker, but arrived in Boston in 1903, ready to make his fame and fortune. After a number of odd jobs, he moved to Montreal and worked for a banker that covered above-average interest payments with deposits on new accounts in the bank. As the wheels were turning in his mind for a way to make money on his own, Carlo hit hard times and was arrested for check forgery, but jail time provided mentors in the art of swindling and only strengthened his resolve to make big money and quickly.

After his release, he migrated back to Boston and fastened onto the “backbone” of his money making proposition – International Reply Coupons (“IRC”). These certificates could be purchased in one country, then mailed to a recipient in another, and finally used to purchase stamps for further correspondence with the former location. If the value of postage stamps varied to a large degree, then a profit could be potentially made, an early form of legal arbitrage. Ponzi arranged for friends back in Italy to buy IRC’s and then ship them to him for encashment in the states. Margins could be especially high, but the amount of red tape involved for converting small value stamps to cash became a huge obstacle during his early development stage.

The Ponzi scheme takes off

Undaunted by reality, Carlo began marketing a 100% return in ninety days to attract early investors, and it worked. In five months, he had taken in $420,000 in deposits, worth roughly $4.5 million in today’s terms. Money was pouring in at an exorbitant rate, but at a basic level, he could not manage a profit on a single transaction. Following the banking lesson he had learned in Montreal, he abandoned any effort to make legitimate returns, but focused on paying older investors with new funds as they came in the door. He proceeded to live the high life, and local authorities soon became suspicious of his investment activities.

Clarence Barron, the financial analyst who published the Barron's financial paper, revealed that, for his scheme to work, there would need to be 160 million IRC’s in circulation. The United States Post Office put the actual figure at somewhere in the 27,000 area, a far cry from what was needed to support Ponzi’s operation. After several disparaging newspaper articles and investor demands for the return of their savings, Charles Ponzi surrendered to federal authorities.

After a host of trials, prison terms, and more schemes to defraud, he eventually died in poverty in Brazil in 1949. Attempts to determine the magnitude of investor losses assigned a figure in today’s terms of $225 million. When compared to Bernie MaDoff’s theft of $13 billion, Ponzi dwarfs in comparison.

Typical traits employed by this infamous swindler

What were the typical traits employed by this infamous swindler in his much-heralded “Ponzi Scheme”? Awareness can be your first line of defense when it comes to fraudsters trying to steal your hard-earned capital. Understanding the nature of a Ponzi scheme is the best place to start because, even after ninety years, modern-day Ponzi schemes are the same today as they were in 1920.

The format typically involves a complicated financial transaction that most people have rarely heard of, thereby enhancing its mystique and the myth that fortunes can be made on the sly. Outrageous returns are promised at the outset, the “HYIP” concept. Ponzi started with a doubling in 90 days, but gradually geared back to 50% in a year, still well above the 5% rates offered at local banks at the time. Reports are falsified, if even available, and refunds are generously given to add credibility. The huckster appears to be wealthy, with a luxurious lifestyle and classy offices. His clients will also soon become his most avid supporters and sing his praises. A sense of urgency will generally convince potential investors to act quickly, a sure sign that a swindle is in progress. If it seems to good to be true, accept that it is!

Some tips to avoid fraud

We’ll examine the forex HYIP shortly, but let us mention that the way to avoid the aftermath of financial ruin is to avoid the pink dreams that cause the victims to be manipulated so easily by the nonsensical promises of the fraudsters. There are some golden rules of trading and investment in general and one who adheres to those with determination and consistency will find himself invulnerable to HYIPs, pyramids, ponzis and their many other varieties. Do not engage in an activity which you don’t understand. Do not believe in something that you can’t explain. If the promises that you’re told sound too good to be true, do not risk your wealth and savings to chase them.

The forex variety is widespread these days. In the early days of high yield investment programs the advertiser would be limited to a geographical region due to the underdevelopment of international communications. Many conmen and fraud artists are deeply appreciative of the possibilities created by the spread of internet all over the globe. Just like serious business people, they see new frontiers and new profit potential that has been created by these new technologies. Today with one click a Chinese farmer, an American retiree, a Russian businessman can all be lured into the spider’s web and fleeced and skinned is a source of great excitement to the scammers. They were quick to exploit the possibilities of the internet age, with anonymity, lack of regulation and transparency creating the most perfect environment for the spread of their financial diseases.  Visit our who to contact page if you have encountered any forex HYIPs and wish to report it.

Don't trust the hidden secret in the HYIP program

In the forex HYIP program, the fraudster will usually claim knowledge of some kind of secret formula which allows him to register very high profits on a consistent basis. Since the claimed knowledge is almost certainly non-existent, its nature can be anything from an automated trading method, some kind of special and exclusive arbitrage strategy, or less frequently, some proprietary combination of technical indicators that allows the con artist to outperform professional investors and large firms with great skill. What they say that they do is irrelevant: Because in the vast majority of cases they do nothing and just pay you back with your money, depending on your seniority in the structure.

The Joel Ward case

A fine, but somewhat anti-climactic sample of these interesting individuals was Joel Ward, who we also discussed in our forex managed account article. Joel Ward started his career with $300,000 in client deposits at the time of the launch of his Joel Nathan Fund in 2003. In just two years, the amount he was managing had ballooned to $7 million, he was interviewed and quoted on such reputable and credible news sources like the Financial Times, Market Watch and the Wall Street Journal. As a particularly spineless creation of Heaven, Joel Ward would even comment on the irrational attitude of many investors to forex, how they saw the business as a get-rich-quick scheme, how very high leverage was greatly detrimental to a career and how hard he and his firm worked to educate their clients on sensible investment practices and methods. He always emphasized the importance of ethical conduct in the forex industry.

Ethical or not, Joel Ward was very effective in utilizing every penny that was deposited with his firm towards the goal of maximizing profits, but in his case the profits were only for himself. Eventually, when his Joel Nathan Fund ran out of money, he emailed his investors that “There are no funds left in JNF as all monies have been misappropriated.” in this remarkably candid way, which could well be regarded as a good example of high ethics in the forex fraud business. The law sentenced him to nine years in prison for stealing $11 million from his clients.

Later it was found that of the $15 million Joel Ward had acquired, he had traded only $2 million, all of which he had lost in the market. The real return on investment was provided by his Ponziesque use of $3.7 million, which he had recycled to clients. The vast majority of the remaining sum was used to finance his extravagant life style and his purchase of the "Learn: Forex school", which he had used as a source of recruitment for his business. Read more about the Joel Ward case.

The take-away for you as a reader

For the purpose of this article, we’re most interested in the Ponzi distribution model of the HYIP scheme. The most important lesson that a prospective trader will derive from the above is that it is not a good idea to evaluate a forex scheme even on the base of the investment returns: Unless there is first-hand knowledge of the trading practices or a considerable degree of transparency about the firm itself, there is no guarantee that a track record of purported profits in a HYIP is based on actual profits that can be spent safely by an investor. Indeed, we come back to our main principle which we discussed a couple of paragraphs above: Do not believe in anything unless you can duplicate the claimed performance by applying the same methods yourself. Do not believe in anything that you do not understand. Do not risk your savings on the basis of what you’re told by friends or family, unless you are convinced that you know what you are doing.

In sum, a HYIP program is a bomb painted and decorated as a magic apple. Instead of the massive and life-changing profits that you aim at, you’ll end up suffering massive and destructive losses that will ruin your dreams and confidence. If getting rich were so easy, everyone would be millionaires. It is not a coincidence that the only place in which everyone is a millionaire is Zimbabwe these days: Do not trust illogical claims from charismatic individuals who promise profits from a black box system. Do your own due diligence before choosing any brokers or individuals who propose extravagant returns on any investments. Start by visiting our recommended brokers page and also view the list of companies that have been disciplined by the NFA or the CFTC.

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