The Securities and Exchange Commission (SEC) has charged 11 people for creating and promoting Forsage, a fraudulent cryptocurrency pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide. While the lead actors in the scheme are foreign nationals, several of the charged individuals are U.S.-based promoters who were hired to pump up Forsage on websites and social media platforms.
The SEC said Forsage has operated as a pyramid scheme for more than two years. The fraudulent system allowed retail investors to enter into transactions via smart contracts that operate on the Ethereum, Tron, and Binance blockchains.
Unfortunately for defrauded investors, cease and desist actions by federal, state, and foreign officials failed to stop Forsage from continuing to perpetuate its scheme. Emboldened by the regulators’ failures, the defendants allegedly continued to promote Forsage while denying legal claims on YouTube, its website, and other means.
The SEC didn’t release figures on how many people were ripped off by the scheme, but ConsumerAffairs found 7,500 members who were part of a Forsage-related Facebook group.
"As the complaint alleges, Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors," said Carolyn Welshhans, Acting Chief of the SEC’s Crypto Assets and Cyber Unit. "Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains."
While the eleven who were charged have yet to comment, the SEC said two of those charged have agreed to settle the complaint. One other investor has agreed to pay penalties.
How to protect yourself from pyramid schemes
Pyramid and Ponzi schemes are investment scams that promise high rates of return with little risk. The scams build credibility by giving early investors returns on their investments. However, that money comes from the investments of later investors and not as an actual return that honest investments – such as real estate or stocks – produce.
The SEC has created a website – Investor.gov – that details the characteristics of these schemes that investors should be on the lookout for. Here are the common warning signs:
High returns with little or no risk. Naturally, every investment carries some degree of risk, with high-return investments involving more of it. The SEC says investment opportunities that use the word “guaranteed” in their pitch should raise red flags for investors.
Overly consistent returns. Anyone who’s invested in the stock market knows that they’ll probably have to endure the occasional spikes and dips. To that end, the SEC says investors should be skeptical about any investment that regularly generates positive returns regardless of overall market conditions.
Unregistered investments. If an investment isn’t registered with the SEC – like most Ponzi schemes – that is a red flag that investors should investigate further. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
Unlicensed sellers. Most Ponzi schemes are carried out by unlicensed individuals or unregistered firms. Federal and state securities laws require investment professionals and firms to be licensed or registered. Every investor should ask for proof of licensing and registration and, if possible, verify it with the SEC.
One thing that ConsumerAffairs found that might be helpful is the SEC’s “Investment Adviser Public Disclosure” site. It allows investors to search the names of investment companies and promoters, including their years of experience and disclosures.
Secretive, complex strategies. If you see an investment that’s difficult to understand, or you can’t get complete information about it, you’re better off keeping your money to yourself.
Issues with paperwork. Ponzi and pyramid schemers frequently make mistakes on account statements. If you see one, it could be a sign that your funds are not being invested as promised.
Difficulty receiving payments. Lastly, be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Remember – Ponzi scheme promoters need your money to show that the scheme works for the investors upstream. If an investment group tries to prevent you from cashing out by offering even higher returns for staying put, you should take action immediately and seek help from officials if necessary.