If it sounds too good to be true, it may be a Ponzi scheme

Hedging is more than just lawn care
May 10, 2017
The Dow Jones Industrial Average: How much does it matter?
February 5, 2018

If it sounds too good to be true, it may be a Ponzi scheme

Ponzi scheme word cloud

No one believes that they could ever be deceived into investing in a Ponzi scheme, but, as history has shown, even some of the most experienced business people, not just wide-eyed innocents, get tricked into essentially giving their money away.

“We all know there’s no such thing as a sure thing, but we all want to believe it when we’re presented with one,” says Richard Cayne of Meyer International. “And most of these con artists will have slick presentations and the right answer for every question, and soon you’ll be convinced that you found the golden ticket.”

Bernie Madoff may have been the last big Ponzi splash, but, just in the United States alone, almost 60 Ponzi scheme were discovered in 2016 for losses of over US$2bn (as compiled by Ponzitracker). And Ponzi schemes know no geographic boundaries. Every continent has been hit. Also in 2016, Chinese authorities uncovered a US$7.6bn perpetrated by Ezubao, a Ponzi scheme masquerading as a peer-to-peer lender.

A simple concept with astounding results

From currency exchange clubs to a secondary market for theatre and concert tickets, Ponzi schemes are, at its core, extremely simple. Regardless of the set-up, any return on investment or dividend seen by one investor is actually taken from investment from another. So, for this to succeed, the fraudster must constantly be getting ever more people to invest and, preferably, less to withdraw funds.

This usually works well during good economic times, but as soon as any difficulties arise, as it did with Bernie Madoff, and clients start demanding their allegedly doubled or tripled investments, that’s when things fall apart.

Do not ignore the warnings signs

The US Securities and Exchange Commission has a very useful website to educate consumers on Ponzi schemes and how to avoid them. A few alarms include:

  • High returns on investments with seemingly no risk. Even under normal conditions, a yield over 5% to 8% may seem incredible. To get 200%, with a guarantee, is most likely a Ponzi scheme. And if these investments never seem to dip or drop, you should definitely take another look or walk away.
  • Regulations are often the bane of investors, but they are there for your protection. If you deal with an unregistered or unlicensed dealer or investment, there’s no way for you to confirm their legitimacy, and you’ll definitely have less recourse when things go wrong.
  • You get great looking statements showing how your investment has grown, but you can’t find out exactly how this is happening and can’t get your hands on that money easily. It’s still your money, so you should be able to track your funds, and, if necessary, withdraw from or close your account depending on the nature of the investment and asset class.

“Ponzi schemes make legitimate financial consultants like me look really sinister. Transparency in transactions are fundamental requirements for me, and I think for all my colleagues who truly have their clients’ interests at heart.”

If you’ve been presented with an investment opportunity that seems quite incredible, you may want to check with the respective country’s securities regulator or with the International Organisation of Securities Commissions. Or, you can get in touch with Richard and Meyer International.

Comments are closed.