Typical Red Flags of Ponzi Schemes

Last week the FBI posted an article on its site, A Pyramid of Lies, that told the story of the Gentry Ponzi scheme in rural Tennessee. Ponzi schemes are pretty easy to spot if you know the red flags. Even if you don’t know FOR SURE that an investment “opportunity” is a Ponzi scheme, if you see enough of the red flags, you should be smart enough to walk away. Better to be safe than sorry. Invest your money in something that isn’t showing these signs.

Jeffery Gentry stole more than $10 million with his investment scam. Let’s run through the red flags that popped up in the article:

  • Gentry preyed upon the trust of his neighbors. He even stole from his friends, family, and church members.
  • He guaranteed high rates of return on the investment. The problem here is twofold. First, a guarantee of a rate of return is a huge red flag. There are too many uncertainties in the business world to guarantee the performance of an investment. Second is the high rate of return. Anyone promising high rates is suspicious. In this case, Gentry was saying people would earn 10% per month on their investment. (Yes, that’s 120% per year if not compounded.)
  • These schemes usually involve some sort of “special” business or technology. The promoter tells you there is some sort of untapped market or a new technology that is going to make lots of money. (This is how they support their claim of high returns.) In this case, Gentry said there were state contracts to purchase mowers and farm equipment, and these were lucrative.
  • The promoter is constantly looking for new people to get into the game. That’s because he needs new money to pay the “investment returns” to the early investors.
  • An expensive lifestyle is lived by the promoter. In this case, Gentry used money from investors to buy a used car business, as well as real estate vehicles, and more. This is a tough red flag to spot, because the belief often is that the investment is doing well, which is what allows the promoter (who says he has put a bunch of his own money into it) to spend like this. Nonetheless, it’s still something to watch out for.
  • Lack of documentation is a huge red flag. Gentry apparently used a lot of handshakes instead of actual contracts. I’d be willing to bet that he also had almost no documentation relating to these alleged state contracts that the money was to be invested in. Sometimes Ponzi scheme promoters have tons of documentation (often fake) to support their scam, though. So don’t think that a paper trail is necessarily legitimate.
  • Secrecy is often a hallmark of these schemes. Gentry told people that they were lucky to get a chance to invest with him, and they shouldn’t tell others because they might not make as much money if too many people got involved. In reality, the secrecy is so that investors don’t talk with one another or with outsiders who might raise questions.

In this case, investors started talking with one another and realized that the story Gentry was telling couldn’t possible be true. That’s when the whole thing started to fall apart and victims went to the police.



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