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Consumer Corner - Avoiding a Ponzi Scheme

By Alan Marx, AARP Tennessee Fraud Watch blogger

Sometimes there is only a small difference between fame and infamy. A person may start by being famous, but end by becoming infamous. The most famous one was Charles Ponzi. Ponzi’s name became a marker for the type of particularly brazen scheme that relieved the public of millions of dollars.

Fraud Watch

History teaches that Ponzi schemes are far more common than people believe. The perpetrators of these schemes use every trick in the book to separate people from their money. So, what can you do?

Here are 8 ways to avoid getting caught in a Ponzi Scheme:


  1. Be very suspicious of promises of high interest rates. The common denominator for Ponzi schemes is the promise of a return that exceeds market rates, often by a staggering amount – 1000 per cent a year, for example, a rate that is too good to be true for a legitimate investment.
  2. Be suspicious about where the promoter is putting your money and how the promised returns are derived; ask for details, and if you do not understand the investment, stop.
  3. Insist on seeing independently audited financials; if you do not understand the financials, get help.
  4. Do your homework by checking the investment and the promoter’s history with the federal Securities and Exchange Commission, your state securities regulator, the Better Business Bureau, and stories in the financial press.
  5. Research the history of all criminal and civil cases involving the promoter and the company.
  6. Consult an independent financial advisor (an accountant or an attorney, for example), someone who is hired to look out for your interest, not the promoter’s interest.
  7. Do not put all your eggs in one basket – diversify your investments.
  8. Be suspicious if the promoter tries to get you to “let it ride” – keeping all your earnings in for the long haul.

 

For more tips on avoiding these frauds, check out some of the articles below:

“5 Ways to Avoid a Ponzi Scheme: Madoff Edition”: http://money.usnews.com/money/articles/2008/12/16/5-ways-to-avoid-a-ponzi-scheme-madoff-edition

“Ponzi Schemes 101: How You Can Avoid Being a Victim”: http://www.dailyfinance.com/2014/09/16/how-to-avoid-ponzi-scheme/

“Due Diligence: 10 Steps to Avoiding Ponzi Schemes and Financial Fraud”: http://www.aaii.com/financial-planning/article/due-diligence-10-steps-to-avoiding-ponzi-schemes-and-financial-fraud

“How to Avoid Being Taken in by a Ponzi Scheme”: http://www.nytimes.com/2010/12/11/your-money/11wealth.html?_r=0

 

Conclusion
As you can see from the schemes described above, the people who preyed on the public or helped others do so included attorneys, stock brokers, investment advisors, ministers, socially prominent businessmen and women, members of prestigious country clubs, and the like. Relying on relatives and friends for advice in this area may not save you from falling into the trap. You really need to be extra skeptical and assertive in this area.

While there are warning signs that something is not right, watching for those signs is not a complete protection. For example, promises of very high interest rates are common with Ponzi schemes, but not all schemes go to the extreme on their promises. 1000 per cent a year is extraordinarily high, but would you be suspicious of a scheme with lower promises, say 15 or 20 per cent a year? Also, some promoters use high pressure, but others adopt the cachet of exclusivity. You need a connection to get into their pools. The connection may be someone who has received actual returns on his or her investments, but that person may have no way to know if the returns came from actual earnings on the investment or from the next investor who fell into the trap.

Better safe than sorry in this area.

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