Don’t Be Taken in By a Ponzi Scheme

It would be nice to think that you could receive desirable investment returns like clockwork. Just make the right investment, with the right advisor, and you could see regular returns on your investment.

Unfortunately, investing doesn’t work like that. In fact, orderly and consistent investment returns are a sign of a Ponzi scheme.

What is a Ponzi Scheme?

Ponzi schemes are named after an Italian immigrant to the United States and Canada. Charles Ponzi was con man who made money by getting people to invest with him, and promising regular (and impressive) returns. Up to Ponzi, there hadn’t been a con man who was so successful and so widespread.

InvestBecause his impact was so widespread, similar schemes carry his name. Here is how the typical Ponzi scheme works:

  1. The fraudster claims that s/he can get you in on a “special” investing opportunity.
  2. The opportunity looks fairly legit on the surface, and the fraudster might even have some qualifications (real or made up) that seem to indicate you are working with someone who knows what s/he is doing.
  3. You are promised an impressive and regular rate of return. Recently, some fraudsters are toning down the promises, so that they seem more believable. Rather than being promised double in six months, you might be promised access to an “exclusive” fund that returns 10% to 12% a year without losses.
  4. You pay the money to the schemer. The schemer collects money from others as well.
  5. Money taken from other schemers is used to produce the “returns.” You might receive a pay out of dividends, or, if you plan to leave the money in the fund, you will receive doctored statements “proving” the high rate of return.
  6. As long as “investors” don’t all try to claim all of their money at once, the scheme can go on for a long period of time.
  7. Once more people start withdrawing, though, the demand for the assets soon exposes the fact that there isn’t any real investing going on or, if there is some investing, that the returns have been doctored.

One of the most famous recent schemes was that perpetrated by Bernie Madoff. That scheme lasted for several years, since he had a reputation for being an investment genius. There have also been other Ponzi schemes in Canada, most recently here in Edmonton, a woman was charged for running a Ponzi scheme that claimed to give investors access to a special fund offered by the Workers’ Compensation Board.

Is It Too Good To Be True?

Watch out for investment “opportunities” that seem too good to be true. In reality, these schemes are not to be trusted. Anyone who offers a “sure thing” is probably trying to dupe you. The only way for you to receive a guaranteed rate of return is through low-interest products at insured financial institutions. Investments like GICs offer a set rate of return, but it’s not going to be very much.

If someone promises guaranteed returns in stocks, or in some special setup, watch out. True investments with the potential for high gains come with the potential for losses.

Also, be wary of “exclusive opportunities” that play on your affiliation with a particular group. A good investment is almost always open to everyone. Don’t be pressured into investing in something you aren’t sure of, and stay away from “sure things.”

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you everyday! Have a Twitter account? Then follow me for all the latest posts or to send me any comments or questions!

One Response to Don’t Be Taken in By a Ponzi Scheme

  1. About 20 years ago I particpated in an illegal pyramid scheme. Young and foolish me had no idea it was illegal and everyone kept telling me that the reason we had to keep it a secret was that we only wanted the right kind of people joining.

    I put in my $2,200 but by the time I had moved to the top of the pyramid we were accepting lots of people who didn’t have any money and I let them in with the guarantee that they would pay me back when they got their turn at the top. I was very lucky to get my $2,200 back because some people were able to pay a little bit but I made no profit.

    When I started collecting my money is when it started to hit the papers as being illegal. I was terrified I was going to be arrested and a lot of people lost their money.

    I know a pyramid is different than a ponzi scheme but I learned my lesson about things being too good to be true.

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