Six ways to avoid a Ponzi scheme

Anthony Giorgianni

If you are like most people, you would jump at the opportunity to put your money into a sure fire investment that promises above-market returns. 

But if a broker or anyone else tries to sell you on such a deal, use caution. 

You could become the victim of a Ponzi scheme, a type of ruse that for nearly 100 years has ripped off investors for tens of billions of dollars. 

In a typical investment Ponzi scheme, fraudsters promise incredibly good and/or incredibly reliable returns. 

They deliver for a while, but they are not investing in anything.

Instead, they are using money from new investors to pay their obligations to the old, including the exaggerated returns promised to those who “get in on the ground floor.”

But eventually, the operation cannot bring in enough fresh money to sustain itself and collapses.

Besides original criminal Charles Ponzi himself, perhaps the best known perpetrator of the Ponzi scheme is convicted hedge fund manager Bernie Madoff, who was sentenced to 150 years in prison after being found guilty of engaging in an operation that lost about US$50 billion. 

A recent concern is the promotion of Ponzi schemes using virtual currencies, such as Bitcoins.

Though related, investment Ponzi schemes should not be confused with so-called pyramid schemes involving bogus multi-level marketing business opportunities. 

In both cases, money from new participants often is used to pay those who joined early on. And eventually both fall apart as the operation grows to unsustainable levels. But the pyramid focuses on recruiting participants to sell a product, while the Ponzi concentrates on attracting new investors. Here is how to protect yourself:

Be sceptical

If someone tries to sell you on an investment that has huge and/or immediate returns for little or no risk, it could well involve some sort of fraud. 

Be extra-cautious if the returns are being generated by something you never heard of or in a way that is impossible to follow.

Be suspicious of unsolicited offers

Someone contacting you unexpectedly, perhaps inviting you to an investment seminar, is often a red flag. Investment scams often target elderly people, or those close to or in retirement. 

Check out the seller

Research a broker, financial advisor, brokerage company and investment advisor firm. Verify that the professional is licensed and look for any negative information. 

Verify the investment is registered

Ponzi schemes often involve unregistered investments. Start by asking the person offering the investment: If the investment is not registered, ask why (not all investments must be registered). If you are told it is, verify with authorities.

Understand that investment

Never put money into an investment you do not fully understand. There are many online resources to help you learn how to invest and how to evaluate opportunities for risk and potential gain. Do not write a cheque to – or open an account with – anyone who will not fully answer your questions or who tries to discourage questions by saying the investment is using secret, proprietary or too-complex-for-laymen strategies. 

Report wrongdoing

If you think an investment is a Ponzi scheme or any other type of scam, or you have been victimised, file a complaint with the police.

One sign that you have put your money into a Ponzi scheme is that you are unable to obtain promised payments or cash out. Some scammers offer investors even higher returns to discourage them from departing. 

It is vital that you know whom you are dealing with and that you understand any investment before handing over your money. 

Be doubly careful if someone contacts you unsolicited about an investment. If anything seems off to you, report it to the authorities and let them figure it whether it is legitimate or not. –

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