Recent financial news left many investors wary of handing over their hard-earned money to investment firms. Many investors have seen news reports of massive losses involving Ponzi schemes and other white-collar crimes. Responsible individuals have lost millions of dollars due to high-level fraud, and it is understandable that future investors exercise caution when handing over their savings for investment.
A variation of the illegal pyramid scheme is known as a Ponzi scheme. In the 1920’s, Charles Ponzi effectively tricked thousands of residents in the New England area to invest in an elaborate scheme involving postage stamp speculation. Ponzi took advantage of differences between foreign currency that the currency ponzi scheme attorney used by the U.S., and promised his investors he would provide a 40% return on their investment within three months. In reality, Ponzi simply diverted money paid by new investors to pay off old investors, without really making sound investments in their names. Eventually, the scheme crumbled and the fraud was revealed. Unfortunately, the victims of the scheme found that their money was completely gone and Ponzi had only invested in about $30 of the products he had promised.
Modern-day Ponzi schemes often operate under similar conditions. Initial investors receive returns that are simply funds collected from new investors. In the recent case of Bernard Madoff, investors were even provided with balance sheets showing positive returns on their investments, when in reality, their funds were gone. As with Ponzi’s original scheme, it is less a matter of “if” but “when” the scheme will collapse.
Avoiding Ponzi Schemes
Investors looking to avoid Ponzi and pyramid schemes should:
o Use only trusted financial advisors. This includes conducting research on the individual’s credentials, past investment history, and accreditation. Individuals certified by the Financial Planning Association, Certified Financial Planner Board of Standards, and the American Institute of Certified Public Accountants can prove their credentials through their affiliation with the organizations.
o Do the research. Before investing, examine the operations of the organization and ask to see the paperwork they are all required to file with the Securities and Exchange Commission (SEC).
o Follow your instincts. If you feel that an investment is particularly exotic, risky, or unfamiliar, you may not want to invest your money in it. Follow trustworthy investments for safer returns.
o Individuals nearing retirement should be especially wary of their investment status. Chances are, you are counting on the money you’ve invested to guide you during your retirement years. Make sure all investment decisions are made with sound judgment.