Spotting a Ponzi Scheme or Investment Scam
All the talk about Bernie Madoff and others has everyone thinking about Ponzi schemes. Have you invested in a potential Ponzi? It’s only natural to be worried, and in my opinion, investors haven’t been skeptical enough.
How would you spot a Ponzi scheme? My latest book, Expert Fraud Investigation: A Step-by-Step Guide details some questions you should ask yourself about the investment:
- Does the business of the company make sense in light of market conditions and your general business knowledge?
- Does the company exist because of some secret, revolutionary new process or product? If so, what proof is there that the technology or process is legitimate?
- Does the company rely on some rare gem, piece of real estate, antique, or other hard-to-find item? If so, is the investment scheme really scalable to the extent that the promoters suggest?
- Does the company’s performance make sense when compared to other companies in the industry?
- What do objective third parties have to say about the company and its business? Are those things in line with what you are being told? Or are third parties suspiciously quiet about the company and its offerings?
- Is the business of the company so complicated that an ordinary person cannot really understand what it is selling or how it is operating?
- Are unusually high rates of return on the investments being marketed?
- Are such returns possible or probable? If such high rates of return are so easily obtainable, couldn’t other companies do the same?
- Is the company guaranteeing rates of return on investments with them?
- Can their promises be verified in any way?
- Is the company’s success dependent on exploiting a tax loophole or other government regulation? If it was possible and legitimate, couldn’t more companies do so?
- Are certain parts of the business unusually secret? Is there a general reluctance to disclose key facts?
- Who really works in this operation? Does it appear to be just the owner and a few other people? Does that level of staffing make sense in light of the operations or results touted by the company?
- What is the background and experience of the principals? Do they have industry expertise?
- Have any of the principals been involved in scandals or bankruptcies? Do they have criminal records? Have they been accused of running any scams?
- Does the company have a board of directors, auditors, lawyers, and other advisors typical of a company of its size?
- Is the apparent success of the company related to a recent announcement, rather than historical financial results? Can the facts of the announcement be verified?
When all else fails, trust your gut. If you have some reservations about the investment, don’t get involved. You shouldn’t worry about “missing out” on the “next great thing.” The safety of your money isn’t worth the risk of getting involved with a Ponzi scheme or other investment scam.
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Comments (1)
One additional thing, it is usually good to Google the principles involved in the business. Sad to say that wouldn’t have helped in Made Off’s case, but in most cases I see here in Alberta it would help.
A person can be under a lifetime ban from the real estate counsel and get into the investment business here.