Ponzis galore

The last couple of days of media coverage make you believe that maybe there is a Ponzi scheme epidemic going on in North America.  Take these three items.

  • Earl Jones sentenced to 11 years Globe and Mail
  • Pigeon Fever Morley Safer on 60 Minutes
  • Mensch next door charged with Ponzi scheming: printer and master pianist suspected of $27 million fraud Globe and Mail

I urge you to watch Morley Safer and read the Globe and Mail piece. The well-worn phrase, truth is stranger than fiction, is definitely the case in the stories told here.

Even though most people now understand how a Ponzi scheme works, I am going to list five steps to running a Ponzi scheme:

1. Approach investors whose trust is easy to win over. Friends and families are less likely to ask questions and overlook red flags. 2. Create a highly lucrative investment strategy which promises high returns that are hard to turn down. 3. Provide a convincing paper trail – use letterhead of reputable banks, accountants and even regulators! 4. Ask the initial investors to bring in more friends and acquaintances.  This is the rob Peter to pay Paul aspect. 5. Make it feel like an exclusive offer.  It makes the investor feel special, one of a few who will make lots of money.

Earl Jones was sentenced to serve 11 years. Because his crime is considered non-violent by the courts, he might only serve one sixth of his sentence and be out of prison in 22 months – fall of 2011. Cold comfort to the victims who have lost their life savings.

Ponzi schemes will be with us for a long time, no matter how severe or light the penalties are.  Investors must learn to think twice before investing their money, especially if someone close to you makes the offer.  Don’t put your trust in close friends and family; put your trust in doing your homework and getting a second opinion.

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