Ponzi Schemes Remain a Threat
Posted on May 31, 2011 by bob in Financial
The real Mr. Ponzi, scheming his way to wealth.
The “Ponzi scheme,” a disreputable strategy named for, and made infamous by, the 1920’s swindler Charles Ponzi, is generally characterized as a bogus financial ploy wherein earlier investors are paid with funds from later investors. Although the Ponzi scheme has been around for nearly a century, state securities regulators continue to uncover new and more clever variations of this old, but still effective and dangerous, financial scam. One fact about the Ponzi scheme has remained consistent over time—well-intentioned investors still lose their hard-earned money on too-good-to-be-true promises.
Bernard Madoff’s name has become synonymous with the modern-day Ponzi scheme. Madoff perpetrated a multi-billion dollar scam that defrauded investors worldwide for decades until his arrest in December 2008. His investors, often wealthy individuals or organizations, were lured by the promise of consistent, steady annual returns through elaborate, fabricated account statements and other fictitious documentation. His schemes began to unravel in 2008 as the global economy began to decline. Large numbers of his investors began asking to cash-in their investments, only to learn that Madoff did not have enough money to cover their requests and new money was difficult to obtain during the economic downturn.
Every investor should realize that Ponzi schemes, even those as extensive as Madoff’s, are not difficult to detect if they know the warning signs. Use these tips to help you steer clear of the potentially devastating effects of a classic Ponzi scheme:
— Beware of promises of unrealistic returns. Any legitimate investment involves risk. Guarantees of unusually high and/or consistent returns, regardless of market conditions, should be a clear warning sign.
— Diversify everything. Not putting all your eggs in one basket is still good advice. Spread your money around to limit your exposure to the financial pitfalls of any single investment. Never invest your entire nest egg in only one financial product.
— Don’t rely on reputation or word-of-mouth alone—understand your investment. Con artists are experts at building networks of trust, making investors believe they are getting an “inside track” on a hot investment. Be skeptical of any “inside” investment
information.
— Verify the details. Always ask detailed questions before you invest. Never accept that an investment strategy is proprietary and cannot be disclosed. If you don’t understand the investment, don’t invest!
— Auditors. Legitimate investment companies managing multi-million dollars of assets will use reputable, nationally-known auditing firms to certify financial statements. If an investment auditor is hard to locate or identify, consider this a red flag!
— Background check. Always check with the Alabama Securities Commission (ASC) to determine if the individuals and firms offering and selling the investment are properly registered with the Commission, as required by law. If the individual claims to be exempt from registration, follow-up with the ASC to confirm the claim. The ASC can also provide you with the individual’s complaint history.
— Report fraud. If you are suspicious of a scam or think you may be a victim of a Ponzi scheme or other financial fraud, call the ASC, 1-800-222-1253, to report your concerns. Your call may help keep others from being victimized by the same scam.
Joe Borg, Director, Alabama Securities Commission
If you have questions, concerns or complaints about financial products, contact the ASC, www.asc.alabama.gov, or call or e-mail Dan Lord, Education and Public Affairs Manager, 334-353-4858, dan.lord@asc.alabama.gov (or at the toll-free number above). The ASC is located at 401 Adams St., Montgomery.
