2009 might well be dubbed the year of the Ponzi scheme. In March 2009, Bernie Madoff pleaded guilty to 11 felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors billions of dollars. On June 29, 2009, he was sentenced to 150 years in prison.

Late last spring, another alleged Ponzi scheme reared its ugly head in Montreal, namely the Earl Jones scandal. Jones was arrested on July 27, 2009 and was charged with four counts of fraud and four counts of theft. He was released on bail for $30,000. The case is in its preliminary stage with over 160 people claiming they have lost money. Police are investigating each claim, which may result in new charges.

These are two of the most famous cases, but there are more: Manna ($16 million) here in BC, Milowe Brost and Gary Allen Sorenson, ($100 million) in Alberta, for example.  You might want to look at the series we did highlighting the lessons learned from the Manna debacle on the InvestRight blog to understand how these types of frauds are marketed to the public.

Some of these frauds had been going on for a long time.  Here are a few reasons why they fell apart.  In general, investors start to try to withdraw their money at the same time that the perpetrators find it more and more difficult to bring in new investors, causing the scheme to collapse. This happens when people begin to get nervous or suspicious that the investment scheme is questionable. They try to get their money out before it falls apart.

In other cases, people, short of cash for a variety of reasons including last year’s credit crunch, all of a sudden need money to look after their everyday living expenses. Too many people trying to withdraw money at the same time can cause huge problems for a Ponzi scheme. Other reasons could be that the perpetrator(s) think they are about to be caught, so they take the money and run as fast and far away as possible.

Here’s the point. Many investors invest their money in Ponzi schemes because of the generous returns promised. Often investors are convinced to join by friends, family and acquaintances, based on their initial experience with the investment.

Always question high returns promised with little or no risk and don’t take anyone’s word without doing your own homework. Check out our new program Protect Your Money before investing in new investment.  Check out your advisor to see if he or she is registered. You might save yourself the heartache of losing money in a Ponzi scheme.

Click on Let’s talk about investing to read other blogs on this topic and others.

Suggested Reading

BCSC InvestRight Fee Guide: Understand the Costs of Your Investments

BCSC points investors to new Seeking Compensation webpage

Online Dating and Romance Scams: Don’t Let Scammers Steal Your Heart

More Resources

Investing 101: What is Diversification?

Learn the basics of diversification and how to work with a registered investment advisor to build a portfolio

In Your Community – March 2015

BCSC staff ambassadors tour the province, helping people protect themselves from fraud and unsuitable investments. Our goal is to enable BC investors to develop critical thinking skills to inform them of steps they should take to protect themselves when investing. Where we are this month Vancouver Better Business Bureau Top 10 Scams March 5 Media […]