How to Spot a Ponzi Scheme


In the wake of the discovery of Bernie Madoff’s longest-running Ponzi scheme that stole millions of dollars over several years, the Securities and Exchange Commission pledged to crack down on the scams, but consumers are still losing money to crooked money managers.

“Whether the Ponzi scheme is for $10 million or $100 million, it’s continuing to happen simply because someone knew the schemer,” says Chuck Malkus, author of The Ultimate Ponzi: The Scott Rothstein Story. “In most cases it’s an affinity crime where the victim was referred by someone at their church, synagogue or charitable organization.”

Fraudsters don’t just target the super rich; they also prey on people with sizeable savings put aside for investing or retirement and pledge to multiply the funds in a short amount of time. While the promise is enticing, you need to learn the red flags of a possible Ponzi scheme to protect your hard-earned money.

 Understand the Investment

Every money manger needs to be evaluated and reviewed before you hand over your money. Just because a professional comes recommended from a friend or family member, that doesn’t make him or her a good fit for your needs.

"As we’ve seen in the past with guys like Bernie Madoff, they knew so and so who invested with them and got consistent returns and didn’t bother to do their own due diligence,” says Brian Willingham, president of investigative company Diligentia Group.

It’s also important to understand all aspects of an investment, if you don’t understand any part of a strategy ask questions until you are comfortable with your understanding.

“People have a fear of asking too many questions but they have to know exactly what they are getting involved with,” says Willingham.

According to Malkus, not only are people not asking questions to understand how their money is being invested, they are also not consulting with a financial professional like an accountant before handing over money.

“When people hear 15% [return] they ask, ‘where can I sign up?’ as opposed to ‘what information can you provide that I may share with my accountant.’”

Don’t Be Pressured

Ponzi schemers tend to hook victims with promises of high returns over a short period of time and add pressure by saying they are exploiting a loop hole to get the returns and the window is closing. Those claims are rarely ever true and are designed to pressure the victims into acting right away, says Willingham.

Looks Aren’t Everything

Scam artists will often try to impress their victims with fancy clothes, expensive cars and claims of relationships with prestigious organizations of universities. Don’t be impressed with the flashiness, ask about the manager’s background, check their status on the Financial Industry Regulatory Agency's Web site and ask for referrals and reviews.

“If the firm is not established for a period of 10 years or more you’re probably want to run in the opposite direction,” says Malkus.

It also a good idea to check the individuals background to find out if he or she has committed any crimes or has any sanctions against them with regulatory  bodies including the Securities and Exchange Commission or FINRA.

Malkus also suggests doing a Google search of the company and to visit the offices to make sure it’s legitimate. “If they aren’t on Google and you can’t seem to find any information on the individual that would be a huge red flag because it’s an indication they don’t have a proven track record.”