Watch out for Ponzi schemes – or risk losing a lot
Ponzi schemes are investment frauds that have the particularly vicious characteristic of spreading through families and communities. They have hit rich and poor alike and struck people in countries around the globe, with the eZonomics story What is ... a Ponzi scheme? detailing examples in Wales, the United States and Albania.
They are a balancing act that end up crashing
The investment fraud works by paying those who “invest” in it early with money put in by “investors” who join later on – rather than sourcing returns from actual profits. The scam is also known as a pyramid scheme because income from new joiners pays the people a tier above. The structure means that the schemes require a continuous flow of investors putting money in, otherwise the returns being paid out will cease. The schemes have been around for decades – but hit the headlines again in a big way with the 2009 high-profile conviction of Bernie Madoff in the largest fraud of its type.
Look for unrealistic return – and check the paper work
Writer and investment advisor Bonnie Kirchner wrote in Who Can You Trust With Your Money? about three warning signs:
Unrealistic monthly performance statements
Lack of trading confirmations
Direct payments to the “investor” (rather than a custodial firm that provides investor protection and insurance)
She urged people who spotted warnings signs to investigate, to ask for proof of trades and to check the credentials of the custodian of their investments.