Will you know a Ponzi scheme when you’re faced with one?

Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi,
who duped thousands of New England residents into investing in a postage stamp
speculation scheme back in the 1920s. According to the U.S. Securities and
Exchange Commission (SEC), in the classic pyramid scheme, participants attempt
to make money solely by recruiting new participants into the program. You are
promised sky-high returns in a short period of time for doing nothing other than
handing over your money and getting others to do the same.

The program is made to look like a legitimate multilevel marketing program.
Many sound like enticing, exciting investments. But despite their claims to have
legitimate products or services to sell, the money coming in from new recruits
is simply used to pay off early-stage investors — the “rob-Peter-to-pay-Paul”
principle. At some point, the schemes get too big, the promoter cannot raise
enough money from new investors to pay earlier investors, and the whole thing
collapses, with many people losing their money.

Scambusters.org notes some examples of Ponzi schemes include mortgage deals,
real estate deals, oil and gas leases, promissory notes in startup companies,
and housing for the homeless. The Web site says to be suspicious of any company
that “claims to be registered in one state, physically exists in a second state,
and sells to investors in a third. It’s likely the physical company does not
exist, and the scam artist is counting on investors living too far away to check
out the facts.”

According to the North American Securities Administrators Association
(NASAA), investors nearing retirement are particularly at risk of being targeted
by phony investment schemes. The high returns that are promised sound like they
would help make up for losses in retirement accounts. The NASAA advises
investors to “guard against high-pressure sales pitches for unregistered
securities and nontraditional investments such as foreign currency, oil and gas
investments, exotic financial products, or offers to send their money offshore
to so-called ‘safe havens.’”

Considering the number of scams that are out there — and that are constantly
growing and changing — it pays to check a few Web sites if you suspect someone
is trying to scam you. Say no before ever saying yes. Arm yourself with the
latest information. Read the SEC’s “Internet Fraud: How to Avoid Internet
Investment Scams” at http://www.sec.gov/investor/pubs/cyberfraud.htm;
and the “Investor Alert” page of the Financial Industry Regulatory Authority
at http://www.finra.org/InvestorInformation/InvestorAlerts/index.htm.
Scambusters.org has numerous links as well.

If you think it’s too late and you’re already the victim of a Ponzi scam,
contact your state attorney general’s office.