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Ponzi Schemes: What Should You Know About These Investments Traps?

Charles Ponzi

The death of convicted mega-swindler Bernie Madoff reminds us that Ponzi schemes are still part of the investment landscape.

Ponzi schemes are very are back in the news. That’s not because Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi is infamous still, 100 years after his name became well-known.

And it’s not because we celebrate Charles Ponzi (that was Carlo’s American name) and recognize his infamous achievement as a historical event.

Nor is his name in the news once again simply because Bernie Madoff, the modern day Charles Ponzi (and then some) died in April of 2021.

Nope. It’s because today, 101 years later, the Ponzi schemes are very much alive and well. Here’s proof.

Easy Prey Podcast Episode 53: Ponzi Schemes with Steve Weisman


Swindlers gotta swindle…in a big way.

In early April 2021, the FBI arrested a former actor with over-inflated Hollywood connections for allegedly swindling investors in a classic Ponzi scheme. He told investors he had the film-licensing rights to movies from big studios. The news accounts estimate the amount of his fraud at close to $700 million

Ponzi schemes are more common than you think, which means that there are still plenty of wealthy and not-so wealthy investors targets out there. Of course, it’s not the “scheme” you need to worry about. It’s the crooks who operate them.

The question is…why? Why do Ponzi scams work?

The answer is simple:

  1. The never-ending desire by crooks, investors and ordinary people to make easy money.
  2. Greed, plain and simple.
  3. A basic hope or dream that there’s a way (even a shortcut or secret system) for making money fast.

Not all investment fraud cases are Ponzi schemes, so it’s important to know what a Ponzi scheme is. Here’s the definition, from Wikipedia.

“A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity…and they remain unaware that other investors are the source of funds.”

— Wikipedia

There have been similar schemes before, but Charles Ponzi did it in a big way and his arrest made big news. He had been struggling to make ends meet living on the East Coast of the U.S. and in Canada. He innocently stumbled across an idea for making easy money.

Charles Ponzi’s scam? He told clients they’d see a 50% profit in 45 days or 100% profit in three months if they invested in his sure thing: that Ponzi would take their investment cash and buy postal coupons from foreign countries and cash them at face value in the U.S.  Instead, he simply paid off early investors with new investor money.

From them on, his name became forever associated with massive investment fraud of that nature.

Could you be the victim of a Ponzi scheme?

Don’t laugh or dismiss the idea too fast.

Here’s something to consider, and it might be hard to hear or believe: It’s harder than you think to spot a Ponzi scheme, and easy to fall into one.

In other words, if you have money invested with companies that are starting off, do things differently, or dynamic and exciting, keep your fingers crossed that you didn’t stumble into a Ponzi scheme.

Most people might say to themselves, “I’m too smart for that,” but intelligence has NOTHING to do with it.  

In fact, most people who lose money (thousands or millions of dollars) tend to be very intelligent and otherwise business-savvy people.

These two words should convince you:  Bernie Madoff.

Bernie Madoff: A very trusted man: a monumental Ponzi scheme.

If it weren’t called a Ponzi scheme, it might very well be called a Madoff scheme. After all Madoff took in as much $64 billion or more of his investors’ dollars.

Madoff defrauded thousands of investors for more than 17 years and had a sterling reputation over that time. He’d even been the chairman of Nasdaq, the second-largest stock exchange in the world.

And that was part of the reason Madoff could convince so many people, including close friends to invest millions with him. Also, he claimed to have a legitimate investment strategy and returned reasonable, but not outlandish, “results.”

The disturbing part was that Madoff’s scheme wasn’t discovered, more than his scheme simply unraveled. It only came to light when the economy dropped in 2008 and investors began clamoring for their money. The Securities Exchange Commission had failed to investigate Madoff sufficiently, despite warning signs and even some investor and investigator complaints over a number of years.

In 2009, Madoff was sentenced to 150 years in prison for his largest ever billion dollar Ponzi scheme. He died on April 14, 2021.

As you can see, it’s not uncommon for otherwise savvy investors to get caught in a Ponzi scheme. All it takes is that the returns and the people running the investment seem to be in order. Therefore, if the person running the investment is persuasive, successful, popular and seems on a hot streak, it’s hard for investors to pass up the opportunity.

Which is exactly why Ponzi schemes will continue to occur.

Can You Spot a Ponzi scheme?

Thousands of investors get lured into Ponzi schemes every year, and the obvious question that comes to mind is, “where did they go wrong?”

  • Were they greedy? Not necessarily, but high hopes play a part.
  • Were they naive? Some perhaps, but not everyone.
  • Did they let their guard down? Probably yes, to a degree.

However, you must lay all the blame on the skillful, deceitful, and “successful” scammer first…and leave room for pity for all those who were robbed. Bernie Madoff, for example, stole from charities, foundations, good friends, and ruined many lives. He admitted guilt, but said his duped investors were to blame.

Alternative investment…or Ponzi scheme?

According to the SEC, Ponzi schemes frequently share common characteristics that are beyond the norm and should raise a red flag in an investor’s mind:

  • Claims of high investment returns with little or no risk.
  • A record of consistent returns regardless of market conditions.
  • Investments not registered with the SEC or an appropriate state regulator.
  • The investment company doesn’t or won’t explain their complex strategies or investment secrets.
  • Obvious lack of paperwork. However, many Ponzi schemes feature very convincing forged documents.
  • Promises of even higher returns in the future.

Final thoughts.

Do you know if your investments are sound? Do any of them raise a red flag, as far as a potential Ponzi scheme goes? Are you prepared to face your investment advisor and ask tough questions?

We go to great lengths to protect our privacy and identity. We should all to to great lengths to ensure our investments–our money–is in the hands of people worthy of our trust.

Chris Parker, the host of the Easy Prey podcast, interviewed Steve Weisman, a scam expert who provided fascinating insights into the mind of those who commit investment fraud.

You’ll find that episode, along with other scam, fraud and related topics on the Easy Prey podcast. Listen in, and share it those. you care about.

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