Bernie Madoff. Charles Ponzi. Enron. WorldCom. Most of us have heard of them. Some of us are glued to shows like CNBC’s American Greed, which focuses on the stories and details behind many white-collar crimes, many of which have affected everyday citizens. You would think we could learn.
Further compounding the problem is the current economic environment, including volatile stock markets and record low interest rates, which have resulted in bonds and other safer investments yielding historically low returns. As a result, many of us are unsure as to where to invest our savings. Unfortunately, and likely as a result of this, a growing number of us have been presented with investment opportunities that offer high investment returns (sometimes higher than 20 per cent) with “no risk.” Or that’s what they say.
The reality is that often these investment “opportunities” are pyramid or Ponzi schemes, which in general terms are fraudulent processes involving nothing more than returning/circulating a portion of investors’ monies (with the balance going to the fraudulent promoter of the opportunity), rather than the distribution of profits earned from running a legitimate business. Initially receiving their promised return with no delay or disruption, early investors believe their “investments” are legitimate and lucrative and because of this, in many cases, they end up investing even more. Unbeknownst to them, the returns that they receive are furnished by the swindling of eager investors wanting to jump in on the latest “big thing.” And the cycle goes on until the supply of new investors runs out, which eventually collapses the scheme and leaves many investors with nothing.
While in retrospect investors that suffered losses are shocked that they did not pick up on the fraud, the reality is that well designed Ponzi schemes are very difficult to detect. Below are a few traits of Ponzi schemes and recommendations on how to protect you (and your loved ones):
Originally published in the Spring 2013 issue of Comments.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.