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Warning Signs of a Ponzi Scheme and Other Investment Scams
Although the product and approach may vary, there are warning signs that many Ponzi schemes and other investment scams have in common. Look out for the following:
- Unexpected telephone calls, letters, emails, or even personal visits from strangers—or even friends—who offer quick profit schemes requiring an immediate investment from you.
- Promises that you can double your money within a short time.
- Irregular interest payments.
- Stalling by the seller when you ask to withdraw your investment.
- Mark Fickes, a staff attorney at US Securities and Exchange Commission (SEC), says investors also might have noticed inconsistencies in their statements. "The math is wrong. The ending balance one month is not the same as the beginning balance the next month," he says. Also, some investments are listed simply as "stocks" or "foreign exchange" instead of specific securities.
- Fickes says another red flag in Ponzi schemes "is when there is one person doing everything," or if he says his investing formula "is top secret. I can't let anyone look."
- Many Ponzi scheme operators target religious or other affinity groups. Many Jewish investors and charities invested with Madoff; Piccoli allegedly targeted Catholics.
- In general, it's reassuring if investors receive a statement in their names from a third-party brokerage firm. But Fickes says that in his Los Angeles case, clients received statements from a major brokerage firm, but the perpetrator gained access to their accounts by securing their personal identification and posing as them.
He notes investors in Trabulse's Fahey funds are lucky because they will get some money back. "I have one (Ponzi scheme) that just wrapped up in Los Angeles," he says. The perpetrator, Charles Trigilio, was sentenced to 96 months in prison in a parallel criminal case but "investors got nothing."
Fickes acknowledges that it's hard to spot Ponzis because there are few similarities, other than too-good returns. Some Ponzi scheme operators, such as Madoff, are registered with the SEC, although that's no guarantee they will get caught. Many are not registered.
Fickes says investors should "look for independent verification of the claims an adviser is making. Are the financials audited" by a reputable firm?
The bottom line is that if an investment sounds "too good to be true," it probably is. Caveat emptor.
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