How Prevalent Are Ponzi Schemes?

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Money puzzle, licensed via Creative Commons via taxbrackets.org

Ponzi schemes are difficult to unravel, not unlike a billion-piece puzzle.

Ponzi schemes have been in the news recently, but not for bad reasons.  Specifically, proposed and confirmed settlements of three big ponzi schemers have been reached with some of their victims.  The victims of Earl Jones, a convicted Québécois schemer who swindled an estimated $40 million from 150 people, have settled in a class action suit with his bank for about $18 million.  The late Kenneth Wayne McLeod, whose Capital Analysts Inc. group stole $34 million mostly from federal agents and policemen, has proposed settlement for an undisclosed amount with 140 investors (though not without some suspicion, as noted in that article).  And perhaps biggest of all, though not Madoff-big, is Scott Rothstein, the big-mouthed Florida lawyer whose Charlie-Sheen-esque ramblings during a deposition were something of a pop culture phenomenon last year.  He made off with $1.2 billion of investors’ money, with his bank recently settling for $170 million for its part in the scheme.

While reading this, I became curious as to how prevalent these Ponzi schemes are.  Presumably after Bernie Madoff made headlines with his $65 billion scheme, duping even high-profile celebrities and financial leaders, people would be more aware of what they were doing with their money.  However, Ponzi schemers are just as active as ever.  This list on Wikipedia shows 32 caught Ponzi schemers in the last decade alone — some with schemes going back ten years or more.  Just think about how many are perpetrating a fraud right now.

Read on to learn about common investment fraud tactics after the jump.

Investment sometimes seems like a magical opportunity.  Give your money to someone, and in a year or two get it back plus a lot more.  Little to no work on your end, with all the benefit.  If you’re looking to invest your money and want to avoid schemers, use a little common sense and be aware of common tactics by con men.  If someone approaches you with a deal that seems too good to be true, it most likely is.  Rothstein promised his investors 20-30% returns in as little as a month — not just unlikely, but nigh impossible, which a little research would reveal.

Additionally, be wary if you’re approached at all with an “exciting business opportunity” that has a limited-time deadline.  Con men often use this approach, relying on the pressure of time to limit your ability to think straight and fact check.  Always take time to think, because a legitimate investment will always give you plenty of time to do your research.  Rothstein’s scheme was based on structured settlements which turned out to be fabricated entirely.  But if you think about his proposal, which was that philandering husbands confronted with a sexual harassment suit would pay off money into an immediate “settlement”, it appears on the face of it to be a simple bribe.

Of course, hindsight is 20/20, so the most important thing to be aware of when choosing an investment is that good investors have good references.  A career financial analyst with hundreds of people who can attest to his/her success is much more trustworthy than a clientless lawyer with no reputable references and a half-baked idea about illegal settlements.  Also, a third-party, such as a trusted banker or independent analyst (someone not provided by the propositioner) will be able to verify the investments.  In short: before handing someone your money, be absolutely certain that they are trustworthy.

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