As the onslaught of Ponzi schemes continues, investors keep asking how they can avoid becoming a victim. Don Dunn, whose 1975 biography of Charles Ponzi was re-released after the Madoff scandal shocked the nation, recently offered these tips to investors (“Don’t be a Ponzi victim, says his biographer,” Naples Daily News, Feb. 21, 2011):
- Be wary if your friends or acquaintances tell you they’ve just found the ‘next big investment’ or an ‘incredible, new way’ to make money. “A Ponzi scheme depends on the word getting around,” said Dunn. Your friends may not be meaning to lead you astray, but they could be doing so all the same. A Ponzi scheme is built on new money flooding in. If no one new invests, the scheme will quickly fall apart.
- Be wary of anyone who tells you about a ‘fantastic investment opportunity’ that you can’t tell anyone else about. Ponzi schemes are typically spread only through word-of-mouth. If you hear “We don’t want to let too many people in on this!” from another ‘investor’ recognize the marketing ploy for what it is – a trick.
- A red flag should pop up if you can’t understand how you’re supposed to make money. Complex investment strategies are often a defining characteristic of Ponzi schemes and other investment scams.
- Be on the lookout for fraud if you can’t meet with the person who is in charge of running this ‘fabulous investment.’ According to Dunn, most investors never met Charles Ponzi. The same held true for Bernie Madoff. In almost all instances, someone else besides the main perpetrator handles the ‘investors.’
- Watch out for anyone selling a deal that seems too good to be true. “It’s so easy to do, and people are greedy,” said Dunn. “It [a Ponzi scheme investment] seems like a very easy way to make a lot of money in a short time.” Remember: In general, the higher the expected return, the more risk involved. Only con artists will offer you a return of over 10 percent for little to no risk.