Yesterday the BC Securities Commission levied the largest fines ever on the perpetrators of a Ponzi scheme that cost 800 investors about US $ 13 million. They have to pay $ 26 million in penalties and disgorge (give back) $ 16 million. Good luck. This money is most likely long gone and the possibility of the fines being paid is remote at best.
Ponzi schemes are alive and well and always will be. I used to think "OK, now people will smarten up and there won't be anymore of these" after the latest Ponzi scheme was uncovered, exposed, and prosecuted. Especially after the Madoff one. I was wrong. I will always be wrong to think this.
It seems there are two factors that contribute to this endless trail of financial ruin. First, there is no shortage of people looking to make a fast buck by taking advantage of others. In fact, I believe that our society contributes to this problem by focusing on the things that wealth can bring instead of the real work that is required to attain it. The second factor is the ability of people to completely suspend disbelief when presented the opportunity for quick riches.
Ponzi schemes are everywhere. I know. I was approached by two characters once. All the red flags were there. It was a High Yield Investment Program (HYIP) that offered 50% returns per month by trading secret high yield bank instruments. It was simple. You gave them money, they sent it to their guy in Bermuda (flaming red flag), he trades it with his secret trader, they send you 150% of your money within a month. Of course I would have had to sign a confidentiality agreement and by the way would any of my investment clients be interested?
What they did not now was that I had been a bond trader and knew how the system worked. After I had ripped apart their offer I told them it was a Ponzi scheme and that it would end in tears. I also reported them to the local securities commission. They were not happy when they drove away in their severely rusted 15 year old luxury vehicle. It happens.
It could happen to you. Here is a big tip. When ANYONE offers you investments that produce an annual return greater than the long term rate on Canada bonds or the long term rate of return on equities (about 7% per year) then start to ask questions. Your instincts will give you valuable information that you should listen to. If it seems too good to be true it likely is.
Everyone likes to think that they are savvy investors. Frankly few are because they are human and subject to two emotions that get them into trouble all the time. Fear and Greed.
So the next time you are talking to someone about an investment scheme and you start saying to yourself things like "this is great I am going to be rich", or "this is too good to be true", or "wow this is amazing, I cannot believe these returns" stop and take a moment. Remove yourself from the situation. Do not make a decision. Tell them you will get back to them. Then call the securities commission first to see if they have heard of the offer. Next, get professional advice. Seek out a Chartered Financial Analyst (CFA) and ask about the offer.
Do this, and you will save yourself embarrassment, the pain of severe financial loss, and the nagging feeling that you should have known better.