The Game of Greed: Avoiding Ponzi Schemes wit Strategic Moves

Imagine… you’ve saved for years to create a nest egg to carry you through retirement.  You’re no Rockefeller, but you’ve done well… if only it was just a bit more, you think, you could be set for everything you need and want in your Golden Years.

At about this time, a friend gets in touch with a great idea that’s already made her money, just about the same sum you were looking to add to your hard-earned retirement fund. It’s working for her, so you decide to make an investment. I always say,  “if it’s too good to be true it probably is.”  Returns are great for a few months, but cracks start to show in the agreement. Payments are smaller, statements are less detailed, phones are being answered less frequently at the parent office… something’s up, and it’s not good.

It’s not long before you realize you’ve been pulled into the dark side of money management: the dreaded Ponzi Scheme. In a matter of months, decades of savings have dwindled. It’s a terrible feeling of loss, helplessness, and of being deceived, and unfortunately, you’re not alone.

In 2010, the U.S. government established an interagency Financial Fraud Enforcement Task to investigate and prosecute financial crimes under the code "Operation Broken Trust." By December 2010, Operation Broken Trust had identified more than 120,000 people who were defrauded of close to $8 billion collectively through their unwitting involvement in 231 separate cases.

Ponzi Schemes have been around for centuries, too, even before the man they’re named for was even born. The name ‘Ponzi Scheme’ was first coined in the early 1900s after Charles Ponzi, an Italian émigré living in Massachusetts, devised a plan to make money from the sale of International Reply Coupons, sort of a ‘Postage Paid’ option of the day that allowed recipients of mail to reply to the sender at no cost to themselves. Varying rates of postage around the world meant these coupons could often be sold for profit in the U.S., and after discovering weaknesses in the system, Ponzi soon began pitching the idea to friends and colleagues.

It worked, for a while. His investors made money as promised, and Ponzi was swimming in it. But it wasn’t long before he was ‘borrowing from Peter to pay Paul—’ using later investors’ buy-ins to pay returns to existing investors and operating in the red.

Sadly, Ponzi’s story has been echoed in nearly every other such scheme that followed: promises of great returns followed eventually by insolvency that leaves investors wiped out. The only real difference is that the sums lost have become more and more dire: In 2008, when Bernie Madoff’s Ponzi scheme collapsed, it robbed investors of nearly 18 billion dollars – more than 53 times the losses that Ponzi (who also brought down six banks in his wake) caused.

The reason this type of fraud has persisted is that not all Ponzi Schemes are easy to spot. Often, countless hours of work and diligence are put into making these shoddy dealings look legitimate – as much as would go into building a reputable business. Many times, the average investor just won’t see any red flags, because they’ve been deftly hidden by flashy web sites, promising presentations, and professional looking documents.

It’s a nasty business, but there are several things  you can do to helpprotect yourself. Your first level of protection comes with professional advice, from CERTIFIED FINANCIAL PLANNER® practitioners, attorneys, and CPAs. A note here: If you don’t work with at least one of those three, you probably shouldn’t be investing at a larger level yet. Reputable investments require a certain level of sophistication, and Ponzis prey on a lack thereof.

Financial professionals, on the other hand, have not only the  knowledge, but an obligation to research any and all investment opportunities their clients bring to them and to report anything they deem suspicious as part of their corporate duty. Start by checking the status of any investment firm on the Financial Industry Regulatory Agency's (FINRA) web site and ask for referrals and reviews. The Financial Planning Association also offers an exhaustive checklist of questions to review with the help of financial planner, who will help you sniff out anything rotten.

Another hallmark of Ponzi Schemes is the use of current investors to recruit new ones; that means it could very well be a trusted friend, co-worker, or even an organization such as your church that first brings the opportunity to your attention. That smokescreen of trust is part of the fraud, and remember that even if an investment does work out for a friend, it still might not work for you.

Beware of big, sweeping statements in both conversations and literature about an investment: phrases like ‘you can’t lose’ or ‘you’ll double your money in six months’ can be signs of trouble ahead. Look at the company’s website, too. Is it lacking contact information or asking you for a large amount of personal details? The same goes for actual investment documents from the outfit: they will probably look very professional, but the warning signs are not enough details, inflated numbers, or a lack of references to reputable third-party custodians or government bodies. You should always be able to see what’s going on with your money: the investments should be easily tracked on your statements and there should always be an independent way to verify the statement, such as via sites like Yahoo! Finance or Big Charts.

Sooner or later, all Ponzi Schemes fail, but unfortunately, new ones are always popping up. Use your professional network to vet every investment opportunity that comes your way, and your due diligence will protect your hard-earned money from greedy hands.