Ponzi schemes. They're in the news this year, and many folks have discovered that their "investment" turned out to be in a fraudulent scheme. According to news releases from the Securities and Exchange Commission, the SEC initiated legal action over five ponzi schemes this month (April 2009) alone. So what exactly is a ponzi scheme, and how do you keep from becoming a victim?
A ponzi scheme is a fraudulent scheme that pays returns to investors from their own invested money, or from that of subsequent investors. To keep the scheme going, the perpetrators must continue to recruit new investors and get funds deposited into the scheme. Oftentimes, the organizers of the scheme promise higher than average returns to investors, claim that the investment is safe and assert that it is not a security. In some schemes, the organizers may dupe stockbrokers, investment advisers and other professionals into sell the scheme to their clients. And, in many cases, the organizers divert much of the invested funds for their own use and for things like houses, cars, boats and living expenses.
The ponzi scheme is named after Charles Ponzi, who in the early 1900s became famous for using the technique.
So, how do you keep from becoming a victim, from investing in a ponzi scheme? No two schemes are totally identical, and the investment purposes of the schemes vary greatly. Some schemes are set up to invest in mortgages, others in real estate, some in stock trading, options trading, and other investments as well. Though the schemes may be different, here are some warning signs:
* Be wary of promises or representations that you'll receive better than average returns on your investment. When things sound too good to be true, they really usually are.
* Be really wary of promises that you'll get a great return with no risk!
* Do your homework. Look into any investment that you're considering and don't only rely on the salesperson's portrayal of the investment.
* If working with a stockbroker, verify that the product is approved by the brokerage firm. Check with the Compliance Department at the firm; don't rely on the broker's comments.
* If working with a stockbroker, be wary of making a check payable to an entity other than the brokerage firm.
* Be wary of investments where one person does it all, and other folks don't have access to the books and records. And, be wary when the returns are claimed to always be positive, with no periods of negative results.
Remember that its your money when you consider whether to make an investment. Don't rely solely on others. Do your homework, and fully understand what you're investing in before you invest.
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