What is a Ponzi Scheme?

It worked for Charles Ponzi, it worked many years later for Bernie Madoff and it still works today.  This scam is as profitable as it is simple.  It is a classic pyramid scheme whereby you are promised returns that may appear too good to be true (and indeed that is the case), but you know of investors who have made incredible profits by investing with the scam artist.  The problem is that the money used to pay off early investors does not come from successful investing, but rather by paying the early investors with the money of later investors.  Usually there are no investments at all.

TIP

If you are retaining the services of an investment advisor, make sure he or she is not acting both as your broker investment advisor and also the broker dealer.  By giving this kind of control of your money to a single person, you enhance the possibility of fraud.  Also, never invest in anything you do not truly understand.  This rule was broken by many intelligent people who invested with Bernie Madoff although they did not understand how his investment strategy worked.  Anyone who actually carefully evaluated Madoff’s investment strategy and the returns it provided would be able to see that it was a scam.