Ponzi-style investment schemes;
Many con artists use this process to get your money.
The first known Ponzi scheme was operated by Carl Ponzi himself. In 1920’s Boston, Ponzi collected $9.8 million from 10,550 investors, including 75% of the Boston Police force. Ponzi then delivered $7.8 million to his investors as "return" on their investments and spent the rest of the money. Ponzi’s original investors were please with their "returns" that they happily helped him find more investors. The Ponzi scheme thrived until the media took notice; Carl Ponzi was finally arrested and ended up in bankruptcy court. In the end everyone lost money; the bankruptcy trustee sued the individuals who made gains from the Ponzi scheme so Carl Ponzi’s debts could be paid to his creditors.
How did Ponzi lure so many people into his scheme? Investors were attracted to Ponzi’s plan because he guaranteed high returns over a short period of time – profits of 50% every 45 days. Unfortunately, these returns were paid from the investors’ own money and the contributions of other investors. The essence of the Ponzi scheme is that money is ‘borrowed from Peter to pay Paul.’
Today’s Ponzi schemes look like real investment opportunities.
These schemes work well because:
Investors receive "interest" checks (which are really the return of their own money), and they encourage their friends and family to invest;
Investors regularly receive account statements that show profits (which are not real);
Investors rarely research the investment, or check the background of the person offering the investment.
The Ponzi operator often convinces investors to put their ‘profits’ back into the Ponzi; ultimately they lose their original investment plus any profits they may have earned. Ponzi schemes spread by word of mouth. As more people hear of the apparently profitable investment, more investors want to get in on it. Early investors are paid out of money from new investors, at times for many years until the Ponzi collapses. The Ponzi scheme comes to an end when the number of new investors inevitably falls. With fewer new investors, there is no new money to pay the returns. If you lose your money to a Ponzi scheme, chances are you will not get your money back.
Although a Ponzi scheme can be difficult to spot, the following tips will help you protect your money from con artists:
Watch out for investment promotions that offer guaranteed high returns and low risk. If an investment has a high return, you are taking a large risk with your money.
Check the registration of the investment, and the person or company offering it. Many Ponzi operators are not registered to sell securities, nor are the investment itself registered.