Imagine…you’ve saved for years to create a nest egg to carry you through retirement.  You’re no Rockefeller, but you’ve done well… if only it was just a bit more, you think, you could be set for everything you need and want in your Golden Years.

At about this time, a friend gets in touch with a great idea that’s already made her money, just about the same sum you were looking to add to your hard-earned retirement fund. It’s working for her, so you decide to make an investment. I always say, “If it’s too good to be true, it probably is.”  Returns are great for a few months, but cracks start to show in the agreement. Payments are smaller, phones are being answered less frequently at the parent office. Statements aren’t received at all or are provided from the person’s office rather than an independent third party custodian like Fidelity, Schwab or TD Ameritrade.  Something’s up, and it’s not good.

It’s not long before you realize you’ve been pulled into the dark side of money management: the dreaded Ponzi scheme. In a matter of months, decades of savings have dwindled. It’s a terrible feeling of loss, helplessness, and of being deceived, and unfortunately, you’re not alone.

In 2010, the U.S. government established an interagency Financial Fraud Enforcement Task to investigate and prosecute financial crimes under the code "Operation Broken Trust." By December 2010, Operation Broken Trust had identified more than 120,000 people who were defrauded of close to $8 billion collectively through their unwitting involvement in 231 separate cases.

Ponzi Schemes have been around for centuries, too, even before the birth of the man who gave them their name. The term ‘Ponzi Scheme’ was first coined in the early 1900s after Charles Ponzi, an Italian émigré living in Massachusetts, devised a plan to make money from the sale of International Reply Coupons – a ‘Postage Paid’ option of the day that allowed mail recipients to reply to the sender at no cost to themselves. Varying rates of postage around the world meant these coupons could often be sold for profit in the U.S., and after discovering weaknesses in the system, Ponzi soon began pitching the idea to friends and colleagues.

It worked, for a while. His investors made money as promised, and Ponzi was swimming in it. But it wasn’t long before he was ‘borrowing from Peter to pay Paul’, using later investors’ buy-ins to pay “returns” to existing investors and operating in the red.

Sadly, Ponzi’s fraud has been replicated in many such schemes that followed: promises of great returns followed eventually by insolvency that leaves investors wiped out. The only real difference is that the sums lost have become much larger: In 2008, when Bernie Madoff’s Ponzi scheme collapsed, it robbed investors of nearly 18 billion dollars – more than 53 times the losses that Charles Ponzi (who also brought down six banks in his wake) caused.

The reason this type of fraud has persisted is that not all Ponzi schemes are easy to spot. Often, countless hours of work and diligence are put into making these shoddy dealings look legitimate – as much as would go into building a legitimate, reputable business. Many times, the average investor won’t see the red flags, because they’ve been deftly hidden by flashy web sites, promising presentations, and professional looking documents.

It’s a nasty business, but there are several things investors can do to protect themselves. Your first level of protection comes with expert advice, from CERTIFIED FINANCIAL PLANNER™ professionals, attorneys, and CPAs. A note here: If you don’t have at least one of those three, hire one before you make a private, nonregulated investment.  Reputable investments require a certain level of sophistication, and Ponzis prey on a lack thereof.

Financial professionals, on the other hand, have not only the expertise, but the obligation to research any and all investment opportunities their clients bring to them and to report anything they deem suspicious.  While working for a financial firm prior to joining my current firm, I was presented with some sales materials from an entity called Agape. I knew it was fishy and accordingly submitted the documents to the SEC.  As it turned out, Agape was a Ponzi scheme, later to be featured on CNBC’s “American Greed.”  Start by checking the status of any investment firm on the website of the Financial Industry Regulatory Authority (FINRA) and ask for referrals and reviews. Also see if they have ongoing review on the SEC website, and look for litigation and complaints. 

Another hallmark of Ponzi schemes is the use of current investors to recruit new ones; that means it could very well be a trusted friend, co-worker, or even an organization such as your church that first brings the opportunity to your attention. That smokescreen of trust is part of the fraud, and remember that even if an investment does work out for a friend, it still might not work for you.

Beware of big, sweeping statements in both conversations and literature about an investment: phrases like “you can’t lose” or “you’ll double your money in six months” can be signs of trouble ahead.

Again, the case of Madoff is an exception to this point.  One reason he got away with his scheme for so long was that his returns were not at all “spectacular.”  They were, however, too consistent – 8 percent year-in, year-out even in bad market years. Many have speculated that if he had promised or delivered much higher returns (and of course he could have in the years he was taking in huge sums of investors’ money) he would have been caught sooner. In his case, it was not an issue of his returns being “too good to be true”; instead Madoff delivered “returns” that were too boring to be suspected.

Look at the company’s website, too. Is it lacking contact information or asking you for a large number of personal details? The same goes for actual investment documents from the outfit. they will probably look very professional, but the warning signs are not enough details, inflated numbers, or a lack of references to reputable third-party custodians or government bodies. You should always be able to see what’s going on with your money: the investments should be easily tracked on your statements and there should always be an independent way to verify the statement, from outside third party custodians like Fidelity, Schwab and TD Ameritrade or an independent auditor.

Sooner or later, all Ponzi Schemes fail, but unfortunately, new ones are always popping up. Use your professional network to vet investment opportunities you are considering, and know the red flags to avoid financial abuse by checking out CFP Board’s Consumer Guide to Financial Self-Defense. Doing your own due diligence can protect your hard-earned money from greedy hands.


Cary Carbonaro, MBA, CFP®, Managing Director, United Capital of New York and New Jersey 

She is the author of The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear, which will be released in October 2015.

This article is intended for informational purposes only.  We recommend that you discuss these ideas with your tax adviser. United Capital does not offer tax or legal advice; therefore, this article should not be taken as such.