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A graphic with a picture of a man pointing at buildings and a red arrow going up with the title Ponzi Scheme Or Plain Old Incompetence spotting a Ponzi Scheme

Only when the tide goes out do you discover who’s been swimming naked.

Warren Buffett

Welcome to the silly season of investing!  We have seen one of the longest Bull Runs in history, which appears to have come to an end in  2022.  Rampaging inflation forced the FED to hike interest rates from near zero to between 5.25% and 5.5% in 2023.  It was such a long upward trajectory for all asset types that many individuals new to investing had never seen a downturn.

With interest rates artificially held down for so long, it made neophytes and incompetents look like financial geniuses and hid fraudsters, cheaters, crooks and schemers.  Asset prices were artificially inflated by low interest rates at the expense of savers.  The low interest rates enticed some investors way too far out on the risk spectrum.  Some investors are still chasing risky yields.

Bull Markets Create A Bubble In Bull$h!t

The phenomenon in real estate became especially noticeable in 2019 and reached its peak in 2021.  Newly minted Sponsors, Fund Managers and GPs fresh out of weekend courses sold to them by investor gurus piled into value-add multifamily deals touting crazy returns based on Internal Rate of Return (IRR) assumptions that capitalization rates (cap rates) and interest rates would go even lower.  Assuming negative interest rates is usually never a good business plan. We tried to warn about return shenanigans and educate about valuation analysis methods in this June 2021 article at CAN YOU BUY A CUP OF COFFEE WITH THAT HIGH IRR? The other thing we noticed was, at investor events, novice GPs and Fund Managers were claiming hundreds if not thousands of units in Assets Under Management (AUM) despite reading Rich Dad Poor Dad only a year before and then jumping into the real estate investing game.  Upon further discussion with these “Asset Managers,” it turns out they were glorified LPs who co-signed on the loan.  At one event in Houston, we met at least 6 “Fund Managers” all claiming the same 250-unit building as part of their individual portfolio for track record

What Is A Ponzi Scheme?

Ponzi schemes are named for Charles Ponzi who, in the 1920s, scammed investors by promising a 50% profit within 45 days or 100% profit within 90 days buying stamps in other countries and redeeming them at face value in the United States and Canada. Interestingly, Ponzi learned about how to structure his scam from working as a bank manager where he learned first hand how the bank was using new deposits to pay existing depositors (makes you wonder about the banking system today).  He is believed to have milked victims for more than $20 million in 1920, which is about $305,691,000 in 2023 dollars today. The all-time champion Ponzi schemer is Bernie Madoff who masterminded a $64.8 billion scam, making it the largest fraud in history. The US Securities Exchange Commission (SEC) defines a Ponzi scheme as “investment fraud that pays existing investors with funds collected from new investors.” Ponzi scheme organizers will often promise to invest your money to generate higher than average returns with little or no risk.  This goes to show, if it sounds too good to be true it often is too good to be true.  In many Ponzi schemes, the scammer does not invest the money but instead, they use the money from newer investors to pay returns to earlier investors and keep large amounts for themselves. For example, in May 2023 the SEC  obtained an order against Integrated National Resources, Inc. dba WeedGenics, which was run by Rolf Max Hirschman (aka Max Bergmann and Patrick Earl Williams, aka BigRigBaby) for what is alleged to be a Ponzi scheme involving $60 million and about 350 investors. WeedGenics promised investors guaranteed returns of 36% for the expansion of their cannabis operations and the WeedGenics facilities. In reality, there were no such facilities. Hirschman and BigRigBaby are alleged to have spent the money on dining, “adult entertainment” (aka strippers and prostitutes), jewelry, luxury cars, and luxury residential real estate.

Bubbles Can Lead To Bank Fraud

The dangers of ponzi schemes are amplified by the recent $35.7 million bank fraud guilty plea by Matt Onofrio. Onofrio was a Bigger Pockets celebrity who marketed himself as an educator and adviser, teaching people how “to create passive wealth through commercial real estate investments.”  Before 2019, Onofrio was a nurse anesthetist.  Nothing against medical practitioners, but there is very little overlap to then be an expert on “Triple Net Investing – Finding Freedom with Commercial Real Estate’s Best-Kept Secret.”  You can find financial freedom and passive income with Triple Net investments, but there are also some nuances to be aware of that come from having experience in the field.

High Tech Online Ponzi Scams Go Global 

The new frontier of Ponzi schemes and scams are online.  There are now more than 5.18 billion internet users worldwide in 2023 ( 64.6% of the global population).  Crime is following all these people online and, in many countries, online scams are the most reported type of crime.  Online fraud is up to 50% of all crimes in some areas. For the price of a website and a little marketing push, scammers can now go worldwide.  Many scams are even done without a website, using only social media.  Viral scams are truly contagious and have become a global epidemic along with inflicting damage to your financial health. Perhaps one of the largest Ponzi schemes ever was the Onecoin fake cryptocurrency invented by Ruja Ignatova, described by the BBC as “the woman who scammed the world.”  The scam has stolen more than $12 billion and, in certain parts of the world, is still going, using Multi-Level Marketing (MLM also known as a Pyramid Scheme) to sell “educational materials” for cryptocurrency trading.
New scams use social media apps like Telegram, Facebook, Instagram, Discord, Reddit and even LinkedIn to promote outsized returns with complex methods for producing higher than average returns. The scams mostly follow the same script with a physical address listed and usually a corporate registration posted somewhere on the website.  They usually have a series of investment plans starting at $50 paying the lowest percentage rate up to $500,000 plus paying the highest percentage rate. We were approached on LinkedIn from someone purportedly invested in a scam called Papayahub, a supposed operator of pornographic webcam studios.  An “investor” can invest with Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Tether (USDT) and even Dogecoin (DOGE).  The plans promise fantastical daily returns of .5% (182.5% yearly Rate of Return) for a $50 to $1000 investment up to a 3% daily payout (1095%  yearly Rate of Return) for $10,000 to $100,000 investments.  They even went as far as to claim they had investments from several VC firms.  Who knows?  With some of the VC investments in WeWork and FTX they might have gotten VC money.

How To Spot Sponsor Incompetence

The biggest clue to sponsor/issuer incompetence is experience. If the sponsor does not have experience, they don’t know what they don’t know.  Can a sponsor overcome inexperience by adding experienced people on their team?  Early in a real estate market cycle, you have more room to make mistakes. A real world example of this was when we met a sponsor at a conference in early 2022.  She had recently raised over $10 million despite being only recently familiar with real estate for the past 2 years.  We asked her why investors would choose her to invest their money to which she replied, “because I really know asset management.”  When translated into “capital raising speak” that means she found a property manager to run the property.  As an organization who has managed commercial properties for institutional investors (banks, insurance companies, REITs, family offices and hedge funds) for more than 30 years, we can safely say she “didn’t know what she didn’t know.” Dr. Adam Gower has been interviewing experts for his new book, Capital Calls and Rescue Capital, and he is hearing that among sponsors new to the industry, i.e. who entered within the last 10 years, upwards of 90% have either stopped or are planning to stop distributions due to cash-flow issues and are likely to need to make capital calls from their investors.  This means they will have to go back and ask for more money or lose the property and investor capital.

How To Avoid Fraud And Investor Losses

The first task for any investor looking for opportunities is to know your “Why” so that you can make better long-term decisions.  Investing is a long game.  A few investors make millions overnight and some people even win the lottery.  However, building a solid financial foundation usually takes some time, so assessing your time horizon and how much you can afford to lose is essential. Next, Educate Yourself.  If you have a great career, built up a successful business or practice, or are a professional athlete, it most likely took a while for you to reach your current level.  The same goes with investing.  Invest in yourself first and it will pay dividends with your investments. Then, Create a Team.  Investing is a team sport, especially investing in alternative assets like real estate or operating businesses.  Your team members should include tax professionals (accountants), attorneys, mentors, mastermind groups, managers, brokers, and other experts you’ve befriended in the field of your investing interest, to name a few. Remember to Avoid Emotion. As Robert Kiyosaki said, “When emotion goes up, intelligence goes down.”  Do not get emotionally attached to an investment or a deal.  If it looks like a loser, walk away. Don’t try to bootstrap a sow’s ear into a silk purse.  Sometimes a pig’s ear is really just a pig’s ear.  Or if you are in the middle of a bad deal, cut your losses and get out. If it Sounds Too Good to be True it is probably something other than what is being advertised. Then, try to invest for cash flow (income).  Sure tax benefits are great and appreciation builds long-term wealth but cash flow, especially in a down market is a good indicator of solid investment fundamentals.

Questions To Ask Yourself Before Investing 

Before making any investment decision, you should look into the basics: Who, What, Where, When and How.  This goes for real estate investing, stocks, bonds, crypto and alternative assets. Who are they?  Do you know them?  Do they have experience that leads you to believe the investment will be successful?  Does the team have a record of success in the venture or other similar ventures? What is the investment?  Do you have knowledge of the industry or asset type?  Can you understand what they (or it) does to make money?  Is the investment thesis logical? Where is the investment located and where is the team located?  Is the investment in an area known for protecting investors and investment capital?  Does the area or jurisdiction have rule of law, solid contract adherence, and trustworthy culture?  Or is it an area known for excess taxation? When is about timing.  While it is hard to time the market, there are signs when things are overpriced from irrational exuberance and FOMO (Fear Of Missing Out). How are they making money?  Does the investment sound plausible and how are the returns/principal paid back?  If they are guaranteeing higher than average returns by increments of money invested, it is probably a scam.

Due Diligence Questions To Ask Any Investment Promoter 

One of the best lists of Due Diligence Questions we have found is from capital raising expert Hunter Thompson. Hunter uses six questions to drill down the background, experience level, and honesty of the promoter of any investment you might be considering.  These questions work whether you are investing in real estate, stocks, alternative investments, working with a wealth advisor, stock broker, or the hottest crypto online.  As Hunter says: “Remember, in order for these questions to help, you have to actually ask them. So get out there, network and have some conversations with experienced sponsors.

The Six Due Diligence Questions For Sponsors are:

  1. What is the Investment Promoter’s background? (including their track record and the current state of their business)
  2. Is their current bandwidth (staffing and competence) sufficient for their upcoming projects?
  3. Can they provide professional referrals to verify their claims? (auditors, accountants, attorneys, regulators, independent review organizations and websites)
  4. Can they pass a personal and business background check?
  5. Does the sponsor/company actually own the properties/oil wells/equipment/technology they claim to own?
  6. What does your gut feeling tell you about the key principals running the firm?
All six of these Due Diligence questions are important, however, the last question is something that too few investors use to their advantage.  As we said before, if it sounds too good to be true, it often is.  Many investors let FOMO (Fear Of Missing Out) lead them into investing the hottest next thing be it Pepe coin crypto, anything with an “AI” or “Green” tacked onto the name to oversized tax reduction schemes or promises to 1000X in a year. Does the business plan sound plausible and are the people running the investment capable of actually performing the work required to execute the plan? We end here back where we started with the Most Quoted Investor on the planet:
Rule 1: Never lose money. Rule 2: Never forget Rule 1.Warren Buffett

*Note: Note: Invest On Main LLC (collectively have made every attempt to ensure the accuracy and reliability of the information provided. Invest On Main cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.

For more information contact:

Michael Flight

Co-Founder & Chief Strategy Officer of Invest On Main

CEO & Co-Founder of Liberty Real Estate Fund

Co-Founder of Blockchain Real Estate Summit


Michael Flight was named the Godfather of Blockchain Real Estate by Forbes Crypto.  Michael achieved that distinction by co-founding Liberty Real Estate Fund, the World’s First Net Lease Security Token Fund, creating the Blockchain Real Estate Summit. More recently co-founding Invest On Main ( the Real Estate & Alternative Asset marketplace of the future and AcceleratedLaw a faster, cheaper way to create and tokenize securities offerings! 

Michael is a real estate entrepreneur and real estate tokenization pioneer who is an expert in retail real estate investment, redevelopment and real estate on the blockchain.  He started his commercial real estate career in 1985, and then co-founded Concordia Realty Corporation in 1990, which continues to partner with some of the world’s most well-known banks, insurance companies, hedge funds and institutional investors in many successful investments.

DISCLOSURES, LEGAL AND TAX COUNSEL: Invest On Main LLC. (collectively and their affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or undertaking. Invest On Main LLC highly encourages individuals and investors to seek the counsel of a qualified attorney as well as seek the counsel of a tax professional or Certified Public Accountant (CPA) to determine if there are any potential tax liabilities or consequences as the result of anything contained herein.  NO GUARANTEE: All users of this website should understand there are NO GUARANTEES of any success, outcome or profitability of any transaction or undertaking, expressed or implied by Invest On Main LLC or any of its members, shareholders, officers or affiliates and will NOT be liable for any financial or other losses or damages incurred as a result of any undertaking. Go HERE to view complete DISCLOSURES.