Careful Out There – Ponzi Schemes are Alive and Well

Ralph Q. Summerford
Managing Member
October 8, 2014

With all of the publicity that surrounded the Bernard Madoff, Scott Rothstein, ZeekRewards and Allen Stanford Ponzi schemes, among many others, you would think that people would have by now received the message about Ponzi Schemes; how they work and how those investors lose their money. Unfortunately, such is not the case. In her Sept. 30, 2014 “Ponzi Scheme Blog,” Kathy Bazoian Phelps reports 11 newly discovered schemes involving more than 135,000 victims and more than $328 million of investments that I can say with most certainty is gone.

So what’s the hook? The hook is that it seems too good to be true. It also doesn’t make economic sense. As reported in September 2014, Eric Aronson, 46, promised returns as high as 400 percent in his Permapave scheme. The Cay Club Resorts and Marinas promised an upfront “leaseback” payment of 15 to 29 percent of the purchase price as they raised more than $300 million from 1,400 investors. James Moncure, 41, promised 10 to 25 percent in a program to acquire and develop the Quantico Corporate Center in Virginia. Moncure raised $35 million in investor deposits. As the list goes on, the story remains the same – remarkable returns promised that just seem like they are too good to be true. The fact is they are too good to be true, which should be the first warning sign for anyone to not invest.

Ponzi schemes are not complicated. For the scheme to get started, the promoter (“schemer”) will take funds from later investors to pay returns to the first investors. This payment, of course, gives the false appearance the scheme is real and not a Ponzi scheme. The scheme can survive as long as the investments grow and there’s not a massive withdrawal by investors. For example, Bernie Madoff’s scheme continued for decades growing to more than $50 billion. But it inevitably failed, like all Ponzi schemes, when the withdrawals were exceeding the new investments due to the financial crisis, which began in 2007. He was turned in by his children in 2008 when it was clear the scheme could not survive.

Another tell-tale sign is many schemes are “affinity” schemes. The schemer will prey upon members of his or her faith, sports club, ethnic group or any other group that he or she is closely affiliated with. A majority of the time, new investors are referred by friends who want those close to them to share in their good luck.

So how does a person protect him or herself? Due diligence. You have to conduct research on the people, the scheme and do your homework. Many would-be investors will be surprised to learn that at the failure of most schemes, the schemers will oftentimes remark “those investors deserved to lose their money because they were stupid enough to invest.” That is a sad fact to learn when an investor has just lost their life savings.