Scam artists around the world should probably honor Charles Ponzi, the man who perfected the scheme that bears his name that has been used by many scammers to steal billions of dollars from unwitting victims who made the mistake of investing their money with such criminals.  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 Sarah Howe who first used this scheme in the 1870s, it was Ponzi in 1920 who perfected the scam to steal millions of dollars from unwary investors in his scheme through 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 fake, 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.

In the Scam of the day for April 13, 2021 I told you about a recent Ponzi schemer, Zachary Horwitz who, as an actor used the name Zach Avery and was charged with wire fraud related to a Ponzi scheme in which he stole more than 230 million dollars from investors who invested in his movie distribution company which he told investors had business relationships with HBO and Netflix although the truth is that he had no business relationships with either company, but merely forged emails to make it appear that he did.  As with many Ponzi Schemers, Horwitz was able to go on for years paying money derived from new investors to old investors who he promised guaranteed returns of at least 35% until 2019 when an investor of more than $160 million dollars demanded the return of his money and Horwitz was not able to comply.  The investor then went to law enforcement who brought criminal charges against Horwitz, who has now pleaded guilty.  He will be sentenced on January 3, 2021.

TIPS

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.  Also, you should never invest in anything that you do not totally understand.  Bernie Madoff actually had the gall to blame his victims for being scammed by him because he said that if any of them had researched what he had told them he was doing, they would have known that what he was doing was impossible.

Movie investing is a very risky business and no one should invest in any business unless they truly understand the investment.  Savvy investors would have been able to see through Horwitz’s empty promises.  A good rule to follow is to never invest in anything you do not truly know.

Another important way to avoid a Ponzi schemer 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.

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