The Watchdog Report

By Comptroller General Richard Eckstrom

 

 

Promoters of deceptive financial schemes are skilled at making their investment proposals look smart, creative, and fresh. Slick brochures, smooth talk, and strong personalities are used to promote exciting moneymaking plans.  Add the buzz of satisfied customers to the mix and you have the potential makings of a Ponzi scheme.

 

A Ponzi scheme involves attracting investors by paying “profits” to early investors from the proceeds of later investors.  Funds are never invested at all and real profits are never realized except by the promoter.  Usually enough money is returned to the original few investors to make them believe that profits are actually rolling in.

 

A Ponzi scheme, while easy to define, can be difficult to identify.  Since early investors are paid nice “profit” checks, victims are not immediately suspicious.  In fact, the whole idea is to get these unwary participants to entice friends and family members to invest.  After all, it’s only natural for them to share their good fortune with loved ones, right? 

 

Depending on the size of the network, such schemes can avoid detection for quite some time. But one thing is certain.  When the pool of investors dries up, the whole scheme collapses and lots of innocent victims are left with a huge mess.  Meanwhile, the promoter skips town with the money and immediately begins looking for his next group of victims.

 

While such schemes have flourished in recent years, the truth is there is nothing new about Ponzi schemes.  They are actually a type of illegal pyramid scheme named for Charles Ponzi who duped New England investor’s back in the 1920.  Ponzi raked in an estimated $15 million in eight months by persuading thousands of Bostonians that he had found the key to easy wealth.

 

Ponzi concocted a scheme where he claimed to have discovered a way to profit by speculating in international postal coupons.  According to Ponzi his foreign agents would purchase coupons with investor money and exchange them for higher value in the United States.  After paying the first round of investors 50 percent interest, Ponzi never had to repeat his farfetched story, as the money simply rolled in through excited word of mouth.

 

Today’s Ponzi schemes follow this same deceptively simple formula.  Create a buzz by paying nice returns to early investors, and then sit back and watch as the money pours in.  Such schemes are limited only by the number of unwary investors, which sadly seems always to be available when unscrupulous promoters come knocking.

 

Common sense is the best way to avoid being victimized by a Ponzi scheme. Any investment opportunity that relies on word of mouth to attract friends and family should immediately be suspect.  As always, if it seems too good to be true, watch out!  The mere fact that investors believe that they have received “interest” checks is not proof that the scheme is legitimate.

 

Learn to be a watchdog.  Educate yourself and your family about Ponzi schemes and other investment frauds.  Dishonest investment schemes are here to stay and scam artists are constantly thinking up fresh approaches to age-old schemes.   Investigate thoroughly and avoid placing money with an unknown promoter.  Your time and effort may be rewarded down the road through great savings of pain and embarrassment.