Today, the media are abuzz about Milowe Brost and the estimated $400 million losses from thousands of investors in Canada and the United States. The RCMP arrested Mr. Brost this week. They are now looking for his partner, Gary Sorenson, also from Alberta, who is believed to be somewhere in Honduras, presumably hiding from Canadian authorities. Both men were charged with fraud over $5,000 and theft over $5,000, following a three and a half-year investigation.

Unfortunately, all of the characteristics of a Ponzi scheme are in this one. Here are the five characteristics of a Ponzi scheme:

  1. Charming, manipulative leaders/promoters skilled at extracting money from investors. Investors noted that Mr. Brost was “very smart and could rattle off information on a wide variety of financial subjects.” He was successful in keeping his investors away from the regulators and the police by continuing to promise his investors that this was a legitimate project.
  2. High Returns. In the case of Alberta, the offer was for 35 – 40% returns – way higher than what markets and banks can provide.
  3. Pyramid/Affinity characteristics. In order for a Ponzi scheme to be successful, it must continue to bring in new investors. Sometimes there are financial incentives to encourage investors to bring in people and often that means friends and family. The result can be devastating because friends and family also lose their money, and can ultimately blame the person who recommended it to them.
  4. Promises of tax-free or tax advantages. Clearly this is attractive to many people because it implies you can avoid paying taxes. As we all know, you can defer paying taxes, but you cannot avoid paying taxes altogether!
  5. Confidentiality. As was the case of the Manna Ponzi scheme, investors are encouraged, sometimes even made, to sign non-disclosure agreements.

Share this blog with your friends. If anyone knows of a suspicious investment scheme, the first thing to do is report it. Sadly, we find out about these schemes when it is too late and all of the money is gone. Reporting early can result in disruption or stopping the scheme altogether.

Suggested Reading

Investment Fees and BCSC Research in the Media

Investor Alert: BCSC issues warning about Pegasus Pharmaceuticals Group

What are High-Risk Investments?

More Resources

Investor Alert: Income trusts

April 1, 2006 What should I know about income trusts? If income trusts are a bit of a mystery to you, but you want to invest because you have heard great things about them, then at the very least know these three facts: Income trusts are not fixed income investments High yields are not always a […]

In your community this month – November 2011

  BCSC staff ambassadors tour the province, helping people to protect themselves from fraud and unsuitable investments. Our goal is to enable BC investors to develop critical thinking skills so they can become more informed of steps they should take to protect themselves when investing.   Where we are this month    Coquitlam   InvestRight […]