What Is A Timeshare Ponzi Scheme?
Recent reports have shown that timeshare Ponzi scheme fraud is still in operation within the industry. The timeshare Ponzi scheme is one of the most sophisticated and potentially damaging forms of timeshare fraud, affecting many victims in one fell swoop. It is important that you know what a timeshare Ponzi scheme is, how to spot one, and what you can do if you think you have been targeted.
A timeshare Ponzi scheme is an investment scam, in which victims are promised high rates of return at little or no risk. Similar to a pyramid scheme, a timeshare Ponzi scheme benefits the first ‘investors’, whilst sucking money from everybody who joins thereafter to award those at the top; new investors’ funds are used to pay the early backers of the scheme.
These kinds of scams have been around for decades (in fact, dating back as far as 1880). As technology has evolved, including the advent of the internet, so too has the Ponzi scheme. You could be approached at your resort, by phone call or letter, by email, or by visiting a website. Some fraudsters infiltrate people’s social groups to recruit new victims by sharing their ‘top secret’ guaranteed get-rich-quick scheme.
Signs of A Timeshare Ponzi Scheme
Though not limited to timeshare, all Ponzi schemes tend to have similar characteristics. Do any of these sound familiar?
- Promises of guaranteed returns with little to no risk
- Regardless of market conditions, a consistent flow of returns is promised
- Investments are not registered with the regulatory body for the industry
- Details of the investment strategy are obscured; dismissed as ‘too complex’ to understand, or ‘secret’
- Official paperwork for the investment is not available to the ‘investor’
- Removing money from the scheme is difficult
Real estate, such as hotel and apartment developments for timeshare, are among fraudsters’ most favoured vehicles for their Ponzi scams. Why? Well, one of the main reasons is that real estate, particularly in popular holiday destinations, is considered to be a lucrative investment. Secondly, it’s easy to be dazzled by the idea when you can envision a bricks and mortar embodiment of your investment.
A Timeshare Ponzi Scheme Case Study
One of the largest timeshare Ponzi schemes to hit the headlines, back in 2012, found two men guilty of extracting nearly £164 million from ‘investors’. The scam centred around the purchase of two timeshare resorts in the Dominican Republic. It began with the purchasing of a resort, Confresi, which they had bought with the aim of finishing its construction and opening it for business. When they ran into financial problems, however, they began selling securities in the resort. These securities offered the purchaser the opportunity to either occupy a room at the Confresi resort, for an amount of time proportional to their investment or instead allow the room to be rented out in exchange for an “annual non-use fee”. This fee was paid out quarterly to investors, at a rate of between 8% and 12%.
After five years, the investors were offered the chance to cash in their principal or roll it over for another five years at a higher non-use fee. These investors were assured that their investment was guaranteed, and that – over time – they would additionally benefit from appreciation of the value of the timeshare itself.
Off the back of this, while the Confresi was still being constructed, the pair purchased another resort in the Dominican Republic. Sun Village Juan Dolio. They used the same investment strategy on this second resort, but also came up with a new plan.
The new “Passport” product they enacted at the Sun Village resort promised investors fractional ownership interest as opposed to a timeshare. Instead of the non-use fee paid out at the Confresi, at Sun Village investors were promised a 5% return, again paid quarterly, until the Sun Village resort opened. The idea was that, after the hotel opened, investors would then be able to split the net rental proceeds with the hotel. Thus, an investor would make half their investment by cash and the rest on a promissory note.
After a presentation roadshow across the western United States, a total of 1,200 people had purchased $72.6 million in the Confresi, and $91.2 million in Sun Village.
What the investors were not told, however, was that only a tiny fraction of their money would go towards the construction of the resorts. The rest of the money went to existing investors, as ‘commission’. These commissions totalled nearly $60 million and continued to be paid out even in the face of yearly operating losses on both resorts. Both properties were lost to foreclosure in 2009.
Worse still, a significant proportion of investors’ money went on the purchase of a yacht, a small aircraft, and on additional property (that was not part of the scheme).
Despite having charges filed against them, the pair is still on the loose, currently operating a new luxury vacation rental website.
How To Avoid A Timeshare Ponzi Scheme
- Don’t let anyone pressure you into an investment. If you feel you’re being pressured, that is a sign that something is awry. Walk away if you sense any pressure tactics being applied. Always take your time in making your investment decisions.
- Remember, if it sounds too good to be true, it probably is. Be highly suspicious of anything that sounds like a dream come true, because it is unlikely that it is as good as it seems. Investigate it as much as you can before you hand over your money.
- Bear in mind that the returns in a timeshare Ponzi scheme don’t necessarily have to be unbelievable. Suspiciously steady and consistent returns may well be just that… suspicious. Real investments returns fluctuate.
- If you do enter an investment, carefully examine the information with which you are provided. If anything seems amiss, and you are not given it straightaway, this could be a red flag.
What To Do If You Think You’ve Been A Victim of a Timeshare Ponzi Scheme
As with any timeshare that turns bad, it is important to seek legal advice as a matter of urgency. Fraudsters who run timeshare Ponzi schemes make a lot of money by cheating ordinary people out of their savings. They must be stamped out, and the only way to do this is to stand up and make it known that you, and possibly others, are being swindled by the scheme.