Ponzi Schemes – Taking Advantage of Investors

While they’ve taken place in various guises over the last century, Ponzi schemes recently raged back to headlines thanks to Bernie Madoff, who is responsible for the largest case of financial fraud in American history.  Whether you’re a regular investor or just someone who wants to understand more about what everyone means when they’re talking about these schemes, it’s easy to grasp the basic principle behind them and to understand just why they’re so detrimental.  Many people have lost virtually all of their savings due to Ponzi schemes, and oftentimes entire fortunes vanish as a result of them.  Here’s a bit of info on these fraudulent rackets.

Ponzi schemes take their name from Charles Ponzi, who ran a highly successful one in 1920.  The scheme wasn’t invented by Ponzi, but he had more success with it than anyone before him and he quickly rose to infamy as a result.  Basically, Ponzi schemes work by providing payments to investors from the money that they’ve already invested or from funds that new investors place into the scheme.  Fake records and account statements are usually used to help cover up the total lack of profits, and whenever a payment is requested it will simply be taken from new funds.

Obviously, Ponzi schemes can’t sustain themselves forever.  Madoff managed to perpetuate his particular scheme for quite some time, but eventually either phony securities will be noticed by enforcement agencies, investments slow to the point of rendering the scheme inoperable, or the perpetrator of the scheme simply vanishes.  In many cases, investors will actually reinvest their money at the request of the perpetrator – a fact that helps maintain them for some time.  Eventually, however, the steam will run out of the operation and it will come crashing to an end.  There are a few things you can remember to help yourself avoid these schemes.

First of all, just be sure that you’re actually following your investments.  Unregistered securities are a red flag for trouble.  Also, be sure that you understand that higher than average returns being promised to you that sound too good to be true very well could be.  Try to find investment brokers that you really trust and that your peers have faith in as well.  And be sure that you diversify your investments, just in case you accidentally become part of Ponzi schemes.  Judicious, carefully researched investment is the best prevention and the best protection for your money.

About Richard Wilson