Don’t Fall For A Ponzi Scheme (or Madoff Scam)

It’s as old as dirt and has been going on throughout history, ruining lives across the world. What is this, you may ask? Well, it’s the Ponzi scheme.

My Brush With The Ponzi Scheme

I actually know quite a number of people who’ve been affected by this particular form of fraud (unfortunately, from both sides of the crime). I’ve been “exposed” to Ponzi and pyramid schemes a few times in my life primarily because it’s a common set up in a lot of countries and communities that tend to be closely knit. In many cases, there is a resemblance here to more innocuous marketing schemes that may not necessarily be labeled criminal, but may perhaps be called questionable or ethical by some (e.g. multi level marketing or network marketing). I’ve seen variants of this scheme surface and resurface, oftentimes hitting very close to home. It’s pretty common in other parts of the world, and much less policed elsewhere, given how ingrained in some societies and cultures this money redistribution program happens to be, but it can happen anywhere, as evidenced by the huge Madoff scandal.

When I read about Madoff, and how well-respected he is — being the ex-Nasdaq chief and all being able to pull this heist, I wasn’t as shocked as I could be. Why? Because he looks to me as exactly the kind of person who’d fit the profile of a schemer or embezzler: the unassuming, respectable, dignified, experienced, intelligent, wealthy individual that everyone trusts. When I witnessed my dear family members’ assets succumb to a disintegrating pyramid scheme, it turned out that the very people we so loved and trusted were its masterminds. Our hundreds of thousands of dollars, our trust, our bonds, our relationships that had been on the line….simply crumbled away in those “pyramids”.

Ponzi Scheme vs Pyramid Scheme

Are you familiar with how such a scheme works? A pyramid scheme is a type of Ponzi scheme. With the more general Ponzi case, you are sold the idea that you are investing in something. The con artist will try to recruit you with the story that they have a fantastic investment that rakes in unnaturally high returns. Most of the time, a lot of people you know are already part of the system (as targets). But their participation in this will encourage you to join in. You’ll be convinced to stay in the scheme as long as you are paid attractive returns — which you will, as more victims are drawn in and the fraudster’s pool of funds continues to grow. The pyramid scheme works similarly, except that the recruiting method may involve “innocent” people who are made to take a stake in the “venture” while also serving to get others involved in this activity. Knowing what this scam looks and smells like is the first step towards making sure that you don’t fall victim to this.

Tips To Avoid Becoming A Madoff Scam Victim

So what else should we be wary of? Beyond the scheme itself, it’s WHO perpetrates it. Because that’s precisely how you can potentially become the victim of such a scheme: by finding yourself involved, thanks to a friend, relative, confidante, trusted neighbor who spins you a story about how they can help you grow your riches.

Many times, other victims unwittingly share in that persuasion that urges you to relinquish your savings and to join the rest of the herd, marching to the tune of a Piper who will either eventually get caught, tarred and feathered, or sadly for all, will eventually vanish with everyone’s hard-earned money. So what can we do to avoid falling prey to such a financial mess?

1. Limit any financial relationships with friends and family.
Lots of ponzi schemes originate from your inner circle. When the whole neighborhood is enthusiastically pledging their money to some lone investment plan or business idea that you’re not familiar with, do avoid it like the plague. You want to stay friendly with most everyone, right?

2. Don’t allow people to sway you into investments and business plans you don’t understand. Make sure you do your due diligence and know the kind of financial set up you’re signing up for or committing your money to. Ignorance can bite you in the end.

3. Know where your money is.
The Madoff story tells of many victims who never even knew they were invested with the guy. Also, do the returns sound too good to be true? They probably are! Please don’t invest blindly.

4. Keep up with how your investments are doing.
If you’ve handed your money to someone or some institution, don’t just forget about it. Keep track of your money, stay abreast of developments on your accounts, keep evaluating your investment portfolio performance. Otherwise, laziness can bite you in the end.

5. Always diversify. Always.
Entrusting your entire estate, net worth or asset base to one institution can be very convenient but it can also make you very vulnerable. Spread your money around to avoid 100% losses. You can never be too sure about what can happen. The Madoff story is proof of that — even the most esteemed and respected financial house can go sour at any time.

6. Ask first. Trust later.
That’s my motto. When it comes to my money, I ask countless questions first and try to understand everything relevant to it. The trust and faith may come later, when I understand how much risk I’m willing to take when I fork over my savings. Don’t invest what you can’t afford to lose.

Some Financial Loss Is Inevitable

Of course, even if you abide by precautionary measures and believe that you’ve done everything to avoid financial disaster, nothing is 100% guaranteed. Anything can happen. And sometimes, if you’re unlucky, you won’t know what hit you.

I know my family members didn’t. My friends didn’t. In hindsight, you can say that they should’ve seen it coming. I brag to them that nobody will ever “get” to me. Nobody will be able to sell me on nonsense. I can sniff out a Ponzi scheme, a get rich quick scheme, a scam miles away. Or so I may think.

There but for the grace of God go I.

 
Created: December 19, 2008; Updated: April 24, 2011

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