Ponzi Scams Are on the Rise and Trapping Unwary Investors

The Ponzi scheme is named for Charles Ponzi, who immigrated to the United States in 1903. In the 1920's he devised a postage stamp speculation scheme that duped thousands of people in New England out of millions of dollars. It is thought that Ponzi made over 1 million dollars in one three-hour period. The most amazing thing is that it was 1921. Imagine what that equates to in today's dollars.

Ponzia's scheme was launched when he discovered that he could have someone buy postage stamps in some European country, send those stamps to him and he redeemed them at a U.S. Post Office for the full face amount in American dollars. For instance, he found that he could buy U.S. Postage stamps in Italy for a penny. He bought 100 stamps for $1. He then turned these stamps in at a U.S. Post Office and redeemed them for the full face value of 6 cents. Ponzi got back $6.00 for the $1.00 he had invested. Multiply that by thousands and you see how the scheme works.

Ponzi advertised for investors who provided the capital to increase his purchases and who were promised a 40% return on their investment in less than a month. At first many of the investors did get paid as promised. Unfortunately, this encouraged them to invest more and more money into the scheme.

Eventually the whole scheme collapsed in on itself. The investigators who prosecuted Ponzi discovered that despite the fact that he had taken in millions of dollars, he had only actually purchased about $30 in foreign postage stamps.

Ponzi schemes have been around for almost 90 years. You would think that most people would recognize the scheme and know enough to stay away from it. That is far from the truth.

Ponzi schemes are more prevalent today then they have been in years. The ability to use the Internet as a portal to investment opportunity is the primary reason for the resurgence of the scam. The schemes have become much more elaborate. The public is bombarded with an explosion of advertisements for financial services and complicated new investment opportunities that promise a significantly better rate of return than a bank or traditional investment house.

Why do these schemes continue to be so successful? Greed may be one answer or wishful thinking. There always seem to be investors who are eager to invest large sums of money based on the representation that they will realize a very high yield on their investment. Promised rates of return on the investors money are almost always in the 15 to 20% range and often higher.

A poor economy and rising prices, especially for those on fixed incomes, make the allure of higher returns on their money irresistible. The clever representative of the scheme always emphasizes the guaranteed return on your investment but fail to discuss the high risk factor.

Often the success of the Ponzi scheme relies on the recommendation of investors who have joined the plan in its early stages. Because the early investors are paid off very well, they are eager to bring in friends and relatives. They invest more of their own money into the scam. Their initial success encourages them to go in deeper and deeper until the scheme collapses and they lose everything.

Ponzi schemes are everywhere today. They have become a world wide crisis. The are illegal in the United States and many other countries around the world. That has not slowed the breeding of new Ponzia's every day. Unlike some of the other online scams, the amounts of money that Ponzi schemes take in is almost always staggering.

In May of 2008, the Finnish equivalent of the FBI reported that an an investment club for women had taken in over 100 million Euros from more than 10,000 people. Investigators could find no evidence that the investment club ever engaged in any investing whatsoever.

In Florida law enforcement found that a father and son had bilked over 8 million dollars from only a dozen residents of Sarasota and Manatee counties. This pair got many of their investors from the people they met at their church.

In New York a political fund raiser was found operating a Ponzi scheme involving the supposed importation of clothes from China. He was alleged to have cheated his investors out of more than 60 million dollars.

How do you protect yourself from falling victim to a Ponzi scheme. Common sense is your first line of defense. After that, ask questions. Beware of promises of excessively high rates of return without any mention of risk. A legitimate investment will never guarantee a specific profit, much less an huge one.

Avoid plans that fail to provide specific, detailed information. If the representative tells you that the investment is impossible to understand in layman's terms, run away!

Check with your local and state government agencies for licensing or registration information on the investment and the investment adviser. Anyone selling a security must be licensed. If the representative says he is exempt, check with the appropriate government agency.

If an investment seems too good to be true, that's probably a good clue that you should check very carefully before investing in this opportunity. Make use of local law enforcement. They can give you great advice about operations that may be illegal.

Ponzi schemes are illegal. If you invest it is likely that both the adviser who sold you the plan and your money have disappeared.