The Ponzi Scheme, also sometimes referred to as a pyramid style scheme which fall into the same category, are named after famed American swindler Charles Ponzi who developed the scam in the 1920’s. The basis of the scam is to pay initial investors with the proceeds earned from the newest investors, thereby operating on the “rob-Peter-to-pay-Paul” principle. Investors continue to grow in numbers until the system can no longer support itself and falls apart, but not before a healthy profit is gleaned off the top by the perpetrator.
According to the Securities and Exchange Commission the fraudulent investment opportunities are still quite common and continue to trick investors and the FBI has investigated more than two dozen large Ponzi style scams since the beginning of 2009 alone.
Spotting a Scam
So the question may be posed: Why are people still falling for such obvious scams? The answer is a little more complicated than just spotting a poor investment opportunity. Nowadays the scams are being dressed up to resemble legitimate business investments and even the occasional savvy investor can be caught off guard.
Signs to watch for:
- It’s too good to be true
If the investment just sounds like the return is too great or too easy then that red light should already be blinking in your mind. One of the best ways to spot and stay out of a Ponzi style pyramid scam is to listen to your gut. If things just don’t feel right or sound too easy that may be a signal of foul play.
- Pay attention to the details.
Details to any investment should be of paramount interest, especially if you’re planning on plunking down your hard earned cash. Hazy speculations and non-distinct specifics help cloud these scams in shadows. If every step of the formula isn’t completely clear those lights should be flashing again and you probably shouldn’t make the investment. Remember, a well informed investor is a protected investor. Every investment may carry an inherent risk, but if you know the exact risks you can more accurately decide whether you want to take them. Investing without knowing specific risks is like jumping out of a plane with a backpack and simply hoping there is a parachute inside instead of checking!
- You suddenly are a recruiter.
Remember that these types of scams require a high number of recruits in order to work. While most real business investments have specific financial goals that they have to reach, the Ponzi scam will simply need more capital. If you find yourself being aggressively encouraged to recruit new investors you may want to rethink the ‘opportunity.’
- Stalling or guarantees of huge returns.
If you are guaranteed huge returns that should be one of the biggest light bulbs of all! Remember that investing always involves some risk, no matter how perfect the investment. Anyone who outright promises to pay you a massive return may be exaggerating the truth. If you decide to end your investment and find you are stalled when you try to get your funds back it may be time to alert the authorities.