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« Tragedies breed scams | Home | Debt Consolidation Considerations »
Meet Charles Ponzi
By Mary Beth | April 19, 2007
Charles Ponzi was an Italian immigrant who rose from complete obscurity to millionaire status in only 6 months in 1920. Few people remember the man but nearly everyone has heard of a “Ponzi scheme”. Charles is the grandfather of this scam, variations of which still exist today. The basic premise of the original Ponzi scheme was the exchange of international postal coupons. Ponzi promised his investors a 50% return on their money in 45 days or “double your money” in 90 days. About 40,000 people invested about $15 million all together (roughly $150 million in today’s dollars); in the end, only a third of that money was returned to them. (And Charles died poor and alone in a Brazilian charity hospital in case any of you were thinking of pulling the same stunt.)
These days, a “Ponzi scheme” is essentially refers to any investment fraud in which the operator promises high financial returns that are not available through traditional investments. Instead of investing victims’ funds, the operator pays “dividends” to initial investors using the principle amounts “invested” by subsequent investors. The scheme usually ends when the organizers takes the money and runs or when new investors cannot be found to pay the dividends.
Some tips to avoid becoming a victim of Ponzi schemes:
1. Be wary of people who guaranteed high profits. This is one of the best ways to detect a Ponzi scheme. All legitimate investments involve a degree of risk that makes it impossible to promise profits, much less astronomical returns.
2. Avoid promoters who won’t provide clear and detailed explanations of their investment products. Don’t listen to promoters who tell you that it is impossible to explain their deal in layman’s terms. Their job is to explain the deal to investors like you.
3. Ask for detailed information in writing. Ask for information on the company, its officers and its financial track record. If a product is involved in the deal, ask for documentation of its cost, fair-market value, and existing and potential markets. If a promoter is reluctant to provide information, consider it a red flag of a potential Ponzi scheme.
4. Seeing is believing. Be skeptical of deals that can’t be checked out in person. Be particularly leery of claims that all banking transactions and bookkeeping are handled in remote cities or countries.
5. Resist pressure to reinvest without seeing your “profits.” Ponzi schemes often are kept alive by promoters who convince initial investors to roll over their profits for even better returns. While it often makes sense to stick with a legitimate investment over time, be suspicious of promoters who are reluctant to let you cash in your gains.
6. Look for un-businesslike conduct or disruption of services. Handwritten notes or the lack of office staff can be an indicator of a scam.
7. Check out the company or individual with the BBB and the appropriate state financial regulatory agency.
Ponzi schemes are a bit different than pyramid scams, which I’ll post about another time. So come back…
Topics: Scams |
April 26th, 2007 at 8:53 am
[…] schemes are subtly different from Ponzi schemes (see here). For one thing, the title is much more descriptive…and there really isn’t an interesting story […]