Charles Ponzi defrauded over forty thousand investors of more than fifteen million dollars in Boston in the 1920's selling them investments in postal reply coupons. His pitch was a high return in a safe investment. Although Ponzi's idea of paying off early investors with subsequent investors' money was not new, the idea was named after Ponzi. This fraud is still prevalent today and investors should beware.
Some have described Ponzi scheme frauds as frauds in which there are no underlying investments, such as postal reply coupons. This is usually not true as most Ponzi schemes have some actual investment. They have also been described as pyramid schemes, which is when the investor has the right to bring in new investors and get an investment return for bringing them in as well as the underlying investment. Although pyramid schemes are similar to Ponzi schemes, the fraud strategy is different. Most Ponzi schemes do not use their investors to market to new investors.
Over one hundred forty Ponzi schemes were prosecuted in the past ten years in the US. The amount each fraud scheme defrauded investors ranged from the low millions to almost a billion dollars in one scheme. Almost all of them had an actual investment underlying the pitch. Some of the more common frauds were: affinity frauds, bonded promissory notes, hedge funds, payphone leasebacks, oil & gas, real estate, sub-prime or prime bank loans, and viatical settlements,
Although the investment underlying the fraud scheme's pitch is different, the fraud has similar characteristics, which make it easier for the investor to identify. Each will have "sizzle" in its pitch. An example of this a series of over fifty bonded promissory note schemes run during the past ten years all promised a guaranteed return and a bonding company guaranteeing payment of principal and interest. Even if the underlying investment fails, the bonding company would pay. Tens of thousands of investors lost over $500 million in these fraud schemes, because the bonding companies were fakes and could not pay off, when the funds collapsed.
A second characteristic of a Ponzi scheme fraud is that it is not regulated nor has third party oversight, such as an independent auditor. Of the one hundred forty frauds researched, most were marketed as an investment fund managed by an investment advisor. These funds were not mutual funds, nor were their securities registered with the Securities and Exchange Commission. Most had marketing material, but not private placement documents. Most were not audited and had no other form of oversight. Most did not provide investors financial statements and the ones which did, the information was usually falsified. The ones that were audited used auditors which either did not exist or were part of the fraud. In one documented case Arthur Anderson was the auditor and ended up settling litigation with the funds receiver for over $250 million. Even well respected oversight will not completely protect the investor.
A third characteristic of a Ponzi scheme fraud is a high rate of return. This characteristic is essential for attracting investors away from their safe investments such as certificates of deposit, annuities, mutual funds and others. Greed is the basic sales tool enticing the investor to ignore the normal safeguards he has with traditional investments. The bonded promissory notes frauds offered from 9.9% to over 15% returns, when five year FDIC insured CD's were offering below six percent. One hedge fund was touting returns of over twenty-five percent just after the tech bubble burst. If it looks too good to be true, it probably is.
A fourth characteristic of a Ponzi scheme fraud is an untraditional sales force. High commissions are paid to attract marketers with existing client bases. Often independent securities and insurance salesmen, who have a client base, have been enticed into selling the investments with little or no due diligence. Very few salesmen of these frauds have been employed by larger broker dealers or insurance agencies. In some of these cases the marketing was done internally by the fraudsters. The internet and boiler rooms have been common internal marketing vehicles.
The next time an investment is presented to you, see if these characteristics are present. You don't want to become a victim of a Ponzi scheme fraud.
UNKNOWN SOURCE FROM THE INTERNET
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