Had he not died in 1949, today would have been Charles Ponzi’s 135th birthday. Scam artists around the world should probably honor the man who perfected the scheme that bears his name that has been used by many scam artists, the only criminals we refer to as artists to steal billions of dollars from unwitting victims who made the mistake of investing their money with him. Although, Ponzi was not the first to use the technique of paying off early investors with the investments of later investors in an effort to make a total sham look as if it is a profitable business, that dishonor should go to William Miller who first used this scheme in 1899, it was Ponzi in 1920 who perfected the scam to steal millions of dollars from unwary investors in his scheme by which he told them that he was able to take advantage of fluctuating currency values to purchase international postal reply coupons at a discount and then sell them at face value in the United States. Ponzi promised, and delivered to early investors, a 50% profit on investments within 45 days and a 100% profit within 90 days. Of course, the entire scheme was a total sham, but eager investors blinded by their greed flocked to him to invest. Eventually, as ultimately always happens in a Ponzi scheme, the scam was exposed and Ponzi went to prison. However, the list of criminals still using this prototype of a scam continues to this day including such famous Ponzi scheme criminals as Allen Stanford, Tom Petters, Norman Hsu, Lou Pearlman and, of course, the biggest of them all, Bernie Madoff who swindled people out of more than 50 billion dollars using this time honored scheme.
So how do you protect yourself from falling prey to a Ponzi schemer? There are a number of things you can do including always investigate the credentials of any investment adviser you are considering using. You can check on individual investment advisers with the SEC, your own state’s securities regulators and the Financial Industry Regulatory Authority (FINRA). However, that would not have protected you from being swindled by the likes of Allen Stanford or Bernie Madoff.
Another important thing is to never use an investment adviser who is also the custodian of your funds. This is a recipe for disaster. The role of an investment adviser or manager should be solely that of advising and making trades. The custodian of the actual investments should be a separate broker-dealer regulated by the Financial Industry Regulatory Authority (FINRA) and backed by the Securities Investor Protection Corp. (SIPC). Never invest in anything that you don’t totally understand and be particularly wary of investments that promise huge returns or no risk of ever losing money even when market conditions are poor.