Ponzi Schemes

The following article was researched and written by the Better Business Bureau of Windsor & Southwestern Ontario President, Mr. Joe Amort and first appeared in the Windsor Star and the Chatham Daily News.

How would you like to triple your money in two months? An enterprising fellow known as Charles Ponzi was able to do just that in New York during the roaring twenties. The scheme that now bears his name appears from time to time. It works like this. Current investors are paid handsome returns from later investors. Suppose that in January you were approached with the idea of doubling your money in one month and invested $1,000.00. In February two other investors are convinced to invest $1,000.00 each. Presto - the January investor has now doubled his money not realizing it is from the proceeds of the February investors. The schemer usually attracts "influential" people who in turn tell their family and friends. As the promised rate of return materializes, individuals begin to invest larger and larger amounts. This investment pyramid continues until the schemer disappears with vast sums of money or until a government authority intervenes. Either way, in a classic Ponzi scheme, most investors lose everything.

Today's investor is certainly more knowledgeable than at any time and wants more proof of where the funds are to be invested. Most are convinced the monies are invested in the stock market. Well, sort of... Most stock trades are done between an investor and a stock broker. Stock brokers are listed in the yellow pages and are licensed to trade in all the major stock exchanges of the world.

However, some stock transactions are done through broker-dealers. Broker-dealers create their own market by promising extremely high returns and usually solicit you by phone at home or your place of business. They sell shares that do not trade on the stock exchanges and they are the only ones that will buy them back. It is unknown to the buyer that if you buy shares from a broker-dealer, you will only be able to sell those shares back to him/her at approximately half of your purchase price. In other words, you immediately lose half of your investment because there is no market for your stock.

Should the person who is running a Ponzi scheme invest some of the funds with a broker-dealer, we have a definite recipe for disaster. Investors beware, contact the BBB if you are solicited to invest sums promising unusually high rates of return in a very short period of time.