It has been over a decade since Bernie Madoff got the nation’s attention by running the biggest Ponzi scheme in history. He took investors for more than $50 billion and, unbelievably, he has recently asked for his 150 year sentence to be cut short for “compassionate reasons.”
Ponzi schemes have the same basic plan and do not need to be done by the high fliers of Wall Street: The schemes use new investor money to pay existing investors. All is usually fine with this scheme until the number of new investors stops growing and the existing investors stop receiving distributions from their investment.
Ponzi scheme prosecutions are growing
The Securities and Exchange Commission (the “SEC”) has brought 50 percent more Ponzi scheme prosecutions in the decade after Bernie Madoff’s arrest than in the 10 years before, according to the New York Times. These prosecutions have identified 4.3 million investors that have lost over $31 billion.
According to a website that tracks the prosecutions of these Ponzi schemes, Ponzitracker, in 2019 over 60 cases were prosecuted which was a 30% surge from 2018. The 60 Ponzi schemes involved a collective $3.245 billion in lost investor funds.
These numbers are pretty staggering – especially when considering that many Ponzi schemes are discovered when the economy struggles, the stock market goes down, and investors start wanting their money back. 2019 was a banner year for the economy and stock market so the surge in prosecutions, in my opinion, is a red flag reminding me to pay attention to where I place my invested funds. Remember, the numbers above relate to prosecuted Ponzi schemes and so the number of fraudulent investments being offered to people has to be much higher.
Some facts to be mindful of regarding the Ponzi schemes that have been prosecuted during the past 10 years:
- Beware the alternative investment. Fraudulent offerings have shifted to less traditional investment offerings to entice investors who might otherwise be wary of a scheme involving traditional investment funds like stocks and bonds. Nearly half of the cases brought in the past decade involved schemes promoting untraditional investment products like investing in gold mines, etc. This is significantly higher than in the decade before Bernie Madoff.
- The accused are concentrated in on the two coasts. Regarding the 2019 cases, more than 25% of the individuals accused of operating Ponzi schemes called Florida home, with California ranking as the second most popular home state with 17% of the accused individuals. Florida, California and New York were home to approximately 50% of the accused individuals but smaller states like Delaware, Rhode Island, Iowa, and West Virginia also had individuals accused of operating these schemes.
- These guys are giving men a bad name. Men have consistently made up approximately 90% of the individuals accused of running these schemes.
Take these steps to help you avoid being scammed:
- Check out the person offering the investment to you. Ask for the person’s credentials and whether they are acting as a fiduciary to you. You should validate their credentials and the firm they work for via a number of different website searches. For example, you can try FINRA’s website, the SEC website, or the better business bureau. Do not just rely on the testimonials an advisor provides to you because investors of a Ponzi scheme are generally happy until the music stops and they no longer receive their returns.
- Avoid writing checks directly to an advisor. This was an important consideration for me when I chose an advisor. I write my investment checks to a well-known broker to deposit directly into my investment account. I have direct access to the account where my investments are held and my advisor does not have the ability to withdraw any funds from this account except for his standard management fee. With this set-up I always know what my advisor has me invested in and he only has a limited ability to withdraw funds. You should make sure any advisor accounts you have are set-up the same way.
- Do not let greed get the best of you. If the investment being offered has high returns compared to the expected returns of investments in that same asset class, if the returns are guaranteed, or if the investment just sounds too good to be true then you should not proceed unless you perform very thorough diligence on the advisor/promotor and the underlying investment.
- Perform substantial due diligence on any alternative investments. Investing in non-traditional investments can be trickier to manage and sometimes these investments do not allow you to have direct access to the accounts that hold invested funds. If you decide to invest in alternative assets then performing substantial due diligence on the investment and the person offering the investment will be critical to ensuring you pick the right opportunity to invest your money. If you do not have the experience to conduct such diligence you may want to hire someone that does or move on to a more traditional investment model.