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AM I A PONZI-SCHEME VICTIM?

The numerous national and even local Ponzi-schemes that have come to light in recent months share a common thread - victims are always left wondering how they could have better protected themselves. In the wake of a turbulent global economy with no immediate end in sight, it is almost certain more schemes will be revealed in the coming months, begging the question "am I Ponzi-scheme victim?" Unfortunately, there is no sure fire answer to this question. However, a comparison of recent and past schemes suggests that by combining some common sense principals with a healthy dose of skepticism, there may just be a few tell-tale signs that investors can watch out for. Before reading this article, you may wish to read my earlier post at overregd.lindquist.com/2009/07/articles/litigation-trends/another-day-another-ponzischeme/ which talks about how some common types of Ponzi-schemes work.

Step 1: If it sounds to good to be true it probably is. I mentioned this in my earlier post and whoever came up with this phrase long ago probably never dreamed it would be applied in a blog article about Ponzi-schemes in the 21st century. Yet its application in this context couldn't be more appropriate. Ask yourself this question: if there was a guaranteed way to make 10-12% or more on your investment with little or absolutely no risk, why isn't everyone doing it? Naturally, the Ponzi-scheme artist would tell you that he or she is "one of only a few" or perhaps "the only" person who knows about this investment. But is that really the case?

Step 2: Apply healthy skepticism. People have been buying and selling stocks, bonds and many, many other types of investments since the better part of the 20th century. So what is the likelihood that someone has really come up with an unheard of method for making an annual 10-12% return on investment with little or no risk? Keep in mind, over the past 30 years the stock market has only averaged about 10-11% and as anyone looking to retire in the next couple of years can attest, their investments have taken a significant hit and may take several years to bounce back, if at all.

Step 3: Do some due diligence. If nothing else, the Madoff scandal has brought national attention to the fact that people can be very greedy, and in certain circumstances will take advantage of those closest to them - their family and friends. An interesting point about the Madoff scheme is that the promised rates of return were not so high as to draw attention from regulators or even cautious investors - somewhere around 10%. At the very least, this is a signal that Ponzi-scheme artists are getting smarter and more adaptive to changing times. Gone are the Ponzi-schemes of yesteryear, where investors would be promised seemingly unheard of 20-30% returns. With a plethora of information at the fingertips of anyone connected to the World Wide Web, there is probably enough information circulating that most people might pick up on the fact that such investments are a sham. Unfortunately, the Ponzi-scheme artists know this.

So what can investors do? Know the basics. First, be aware that when you generally invest with a broker-dealer you will be asked to fill-out an investment objective questionnaire and other opening account forms. Assuming you have an account you will also receive account statements. Importantly, the account statement is your way to view the performance of your investments. Typically, it contains your account number, the date of your investment, dividends or interest paid, and other information about your investment such as its current value and sometimes whether it gained or lost money since your last statement. More often than not, the statements are printed on company or official looking letterhead (not plain white paper) and will be delivered to you on a regular periodic basis, i.e. monthly, quarterly and annually. Second, get to know your broker and his or her supervisor. Before investing, meet with your broker, at his or her office, and then also ask to meet his or her supervisor. Again, this is not always immediately possible when you are investing with a broker who is located in a satellite office, but more often than not, the branch manager at large broker-dealers are happy to meet their customers - it deepens customer relationships.

Finally, repeat steps 1-3, even after you have purchased your investment. If something doesn't pass the smell test or seem quite right, you owe it to yourself (and your retirement) to dig further.

In a nutshell, there are many fine brokerage firms with top notch individuals ready to help you reach your investment objectives. Unfortunately, it only takes a few large scandals to tarnish the industry and put off many would-be investors. By applying some basic common sense principles and a little bit of skepticism, you will be better prepared to spot a Ponzi-scheme.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on August 19, 2009 (boomark / email).