Nearly ten years on since the arrest of master Ponzi schemer Bernard Madoff, the Ponzi fraudsters are still with us. Maybe not with as much money as Madoff’s billions, but powerful enough to do a lot of damage.
Being devoted to finding assets, this blog doesn’t usually talk about ways to lose them. But we have had asset searches in which we suspect money was lost in a Ponzi scheme. The schemer may have assets, just not as many and not in the hard form the investor thought were there.
It never hurts to remind ourselves of what Ponzi schemes are and how to check to see if one of them is coming for you and your money.
We’ve written here about some of the warning signs that alerted plenty of smart people that Madoff was too risky. Sadly, those signs and repeated whistle-blowing to federal regulators failed to prevent massive losses by investors, as Madoff’s scheme went on and on. Other Ponzi schemes are easier to spot.
The Securities and Exchange Commission defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” Also known as pyramid schemes, they are named after Charles Ponzi (below) who swindled people in the U.S. in the 1920s before his get-rich-quick fraud collapsed.
If the scheme doesn’t make a profit, it’s bound to collapse because it always needs more members than it had before (to supply the prior investors’ returned capital plus an ‘investment return.”)
Combined with various kinds of fraud we’ve dealt with as well as the Madoff experience, we offer some signs that an investment opportunity you are offered may be one to be avoided.
- Length of the investment enterprise. Madoff’s decades-long Ponzi operation was unusually old and added to his trustworthiness, but many Ponzis are much shorter-lived affairs. According to a paper Who Gets Swindled in Ponzi Schemes? the average lifespan of U.S. Ponzi schemes prosecuted between 1988 and 2012 was four years. Charles Ponzi’s racket lasted just one year. If your supposed investor can show you no track record or one that’s just a year old, be on extra-careful alert.
- Promise of outsized returns. While Madoff cleverly promised low but rock-steady returns (also extremely difficult to pull off for real), the average Ponzi scheme in the sample above promised between 111 percent and 437 percent returns. The lower the promised return, the longer the scheme can on, as long as new investors keep coming in. If it’s a very high return, especially if it’s “low risk,” the old “if it’s too good to be true, it’s probably not true” applies.
- If they aren’t asking for millions, it’s probably not a fraud, right? Wrong. The average investment in Ponzi schemes between 1988 and 2012 was $431,000. Half of all investments in Ponzi schemes were for less than $87,800.
Sometimes you don’t have to crunch numbers to realize you’re being courted by a crook. The main reason we concluded one of our clients had been taken by a Ponzi scheme was that the companies he had invested in didn’t even exist.
We are self-serving when we say this, but it could help you too: If you are prepared to invest $100,000 to earn another $50,000 or to double your money, why not take one or two percent of that and spend it on some due diligence?
Investors in Madoff and the other schemes would have saved themselves a world of heartache.
 By Stephen Deason, Shivaram Rajgopal and Gregory Waymire of the business schools at Columbia and Emory Universities and quoted with permission. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2586490