Ponzi Schemes 101

Welcome to Ponzi Schemes 101. Okay, class, we are ready to begin our exploration of Ponzi schemes--what they are, how to recognize them and what the legal and moral ramifications are for becoming an "investor". The first thing that people need to know is that there are thousands and thousands of people who are currently investing in illegal high yield investment programs and most of them haven't got a clue that it's illegal. Most of them look at the small picture--"I can more than double my investment in 60 days."

According to Wikipedia's definition, a Ponzi scheme--named after Charles Ponzi--is "a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business."

Charles Ponzi (aka Charles Ponei, Charles P. Bianchi, Carl and Carlo) was the most notorious swindler of his time in the early 1900s in the US, but his criminal activities started off in Canada when he forged checks for himself. After his return to the US, he became an immigrant smuggler, then was involved in IRC and stamp fraud, which he later lured others into participating in, promising them high returns for their investments. After a run of bad press and investigations into his Securities Exchange Company, Ponzi was forced to pay out some of his investors. This caused chaos and fear and more investors pulled out. Eventually, federal agents raided his company and shut it down.

This is basically how a Ponzi scheme works:

1. An "investor" or admin advertises that he is willing to help you achieve high returns on a small investment over a short period of time. He lures you in.
2. He will tell you that he'll invest your money in offshore investments, high yield investments, hedge trading or other investments, but he won't give you exact names of said "investments" and you'll have no way to confirm where your money has gone.
3. He will tempt you with the promise that your money will see a high return over a short period of time, which could be a week, 2 weeks, a month, two months.
4. Once you "invest" a small amount of seed money, you will usually see the return with little problems (on paper), but you'll be advised or tempted to keep some money in and let it grow.
5. You might start taking out money, but usually in small amounts.
6. Most people begin increasing their initial investments after they see it "work" once or twice. That's what the scammer is counting on.
7. Your investment isn't being invested in legal "offshore investments" that gives that high of a return. It'll be in a regular interest bank account or other accessible place, and since the money from thousands of investors is pooled into that one place, the admin is making some minor interest.
8. Your invested money will be used to pay off earlier investors and to pay the operator/admin. You invest $1000 and your money is going to someone else as their "interest earned" or to an admin so he can buy a fancy home or sports car.
9. A Ponzi scheme will offer a referral bonus so that you will bring in new investors. Why? So they can pay off the people before that new person you bring in, including you.
10. This scheme relies on people's yearning to make money the fast and easy way. If 10,000 people invest $1000 or even $100, that's a lot of money. Even in a bank, it would make some interest.

Why do Ponzi schemes fail?

• These scams are destined to crash at some point. It is really only a matter of time.
• They will crash because of many reasons, like the person or persons running it will eventually get greedy, take all the money and disappear.
• Or the government will step in and close it down--without warning.
• Or people will wise-up and start pulling their money out, at which time the company folds and the operators steal what they can and disappear.
• Or because people become suspicious and less investments are received, which then causes payout problems.

How do you know if you're involved in a Ponzi scheme?

• Are you getting an abnormally high return on your internet investment? Like 20% or more for short terms like 1 week or 2 months?
• Will the operator of the scheme not give you specific details on where your money is invested, including the names of companies invested in, so that you can check it out? (According to Bill E. Branscum, a financial crimes investigator, "Any legitimate investment opportunity should have an offering circular with specific, detailed information about the company and the investment."
• Were you told you'd get a referral bonus if you bring someone in?
• Has the admin/operator been involved with any similar short-lived investment businesses?
• Has anyone had problems getting their money out?
• Do you make deposits by either e-currency, like e-gold, and INTGold, or third party payment processors like AlertPay, SolidTrustPay, CEPTrust, TriStarMoneyChangers and StormPay.

If you've answered 'yes' to any of these questions, then you are more than likely involved in a Ponzi scheme.

What are some of the signs that a Ponzi may be on the brink of collapsing?

• Is there any sign that other investors have not received payment after they've gone through the steps to withdraw their money?
• Have any of the investors complained of late or incorrect payments or transfers?
• Has anyone been told there is a computer glitch, banking error?
• Has there been problems with investors not getting their money for longer than 2 weeks?
• Has the admin/operator ever suggested that he will limit members/investors?
• Has the operator ever badmouthed a former investor who swears it's a scam?

Some Ponzi schemes you may have heard about:

• Second Life, the virtual computer world, was recently scammed by a "Nicholas Portocarrero", who has refused to reveal his/her real identity. Portocarrero started Ginko Financial, a virtual bank which operated much like a real bank only in virtual funds that happen to be vital to the game of Second Life. When Ginko began to collapse, the virtual world was a buzz and it is thought that this was a virtual Ponzi scheme.
• Ironically, there is another "Nick" that seems to be operating a Ponzi Scheme. Pathway to Prosperity (P2P) has received a lot of attention since it set up in February 2007. A Google search will bring up over 900,000 links, and many of them are complaints by former members and warnings that P2P is a scam. So I checked into it, using the above questions to see if it fit the Ponzi scheme profile. And it does. Not only that, it is run by a Nick Smirnow, which seems coincidental. I found one post by an investor in P2P and it seems the poor investor hasn't received his money in months. I found another very interesting article by someone who investigated Nick Smirnow and Pathway to Prosperity very thoroughly. He points out the similarities between an ad for P2P and one for InvestPlace, a huge scam that cost its members thousands of dollars when its admin or operator disappeared with all the money. Ironically, Nick is linked to that company too.
• "In the fall of 1998, the SEC filed a lawsuit against Robert Cord, Funding Resource Group a/k/a FRG Trust; MVP Network, Inc. a/k/a MVP Network (Trust); FMCI Trust; Funders Marketing Company, Inc.; Fortune Investments, Ltd.; Winterhawk West Indies, Ltd.; IGW Trust; which were accused of violating various securities laws by engaging in alleged high yield investment schemes which were, in actuality, nothing more than elaborate Ponzi schemes. A criminal forfeiture seized various funds, real property, cars, boats and other property belonging to Robert Cord and his various entities. In connection with his role in running the scam, he pleaded guilty to mail fraud." Source: Crimes of Persuasion
• According to Canada.com, "Three con men have been ordered to pay almost $17 million in restitution and fines after they bilked dozens of British Columbians out of millions in a ponzi scheme. The B.C. Securities Commission also banned the men from public markets for life. Malcolm Stevenson and Daniel Byer, both of Abbotsford, and Preston Pinkett II of Virginia, violated B.C. securities laws with their fraudulent firm, International Fiduciary Corp. They promised investors a return of six per cent a month, or more than 72 per cent a year, by flipping bank notes and promising investors they could withdraw their money on short notice from a U.S. account."

Of course, as with all scams, you'll find those that will defend a company, regardless of the evidence in front of them. The truth will come when the Ponzi scheme closes down with no warning, usually within 3 years. My advice: do your homework--yourself. Check out any company that offers high returns. A legal company will be easy to find listed in any business directory and investment companies will be governed in some way, depending on the country.

According to the Ontario Securities Commission, "A company is generally required to put out a prospectus before it sells securities to the public. It includes information like:
• a history of the company and a description of its operations
• a description of the securities being offered
• a list of directors and officers
• financial statements
• a summary of the major risk factors affecting the company
• how the company will spend the money it raises by issuing the securities

Anyone who tries to sell you an investment or give you investment advice must be registered unless they have an exemption."

It's my belief that to be informed is far better than uninformed. In the end, Ponzi schemes will lure people in with its promises of easy money and each individual has to determine if they can continue investing, knowing that it is a Ponzi scheme, knowing that they're taking the next new investor's money, and knowing that they are involved in an illegal investment scam. Sure, $1000 might be no big loss to some, but what if you started investing more? And then more?

This is what Brenda Martin seems to have been involved in--a Ponzi scheme--and she spent over 2 years in a Mexican prison just for unknowingly investing in an internet investment scam. Has she set a precedent now? Will others find themselves in prison because they invested in a Ponzi? These are the questions to ask, and since I know people who are investing in similar programs, I am more than a little worried.

Comments are welcome as long as they are respectful.

~Cheryl Kaye Tardif is a freelance journalist and bestselling suspense author of Whale Song, The River and Divine Intervention. She currently resides in Edmonton, Alberta, Canada.