How to Spot a Ponzi Scheme

How to Spot a Ponzi Scheme

April is almost over, which means—as you may know if you're a fan of presidential proclamations—that National Financial Capability Month is coming to a close.

National Financial Capability Month is a special time of year when we "recommit to empowering individuals and families with the knowledge and tools they need to get ahead in today's economy."

To celebrate, those party animals at the Commodity Futures Trading Commission have published a book by CFTC Commissioner Bart Chilton, "Ponzimonium—How Scam Artists are Ripping Off America," to help investors protect themselves from financial scams.


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Financial Scams on the Rise

Despite more public awareness and government action, financial scams persist, especially as the stock market recovers from the 2008-2009 crash. Regulators have worked to crack down on financial fraud since failing to thwart Bernie Madoff's Ponzi scheme—he ultimately stole billions from high-profile investors.

"We thought all the frauds and Ponzi scams were horrific in the wake of the Madoff scandal, but it is even worse now," Chilton says.

Chilton identifies five red flags of a typical financial scam:

  1. It sounds too good to be true. Like those sneakers that were supposed to tone your hamstrings and calves just by walking, financial scams never live up to the hype.
  2. It's a "no risk" investment. Reality check: Every investment has risks. If you don't know what they are, you shouldn't be investing.
  3. Profits are guaranteed regardless of what the market is doing. Most investments go through periods during which they perform well and times when they fall short. That's normal.
  4. You can't understand the investment. Complexity isn't a sign of investment superiority, but it is an easy way to mask a scam.
  5. You have to keep it a secret. Anyone who sells a legitimate investment opportunity should give you written information that you and your financial adviser can review.

Once you know the warning signs, Chilton adds, you can vet a potential investment by asking the salesperson or broker these questions:

  • Who regulates or licenses the product or service offered?
  • What licenses or registrations do you hold authorizing you to offer or sell this product or service?
  • What written information will I receive about the investment before I make a decision?
  • What are the risks associated with this investment?
  • What are the fees and associated costs, and how are they calculated?
  • Are there any restrictions on accessing funds once I invest?

RELATED: Ponzi Scheme Victim Writes Novel About Losing $1 Million


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