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Are you susceptible to a Ponzi scheme?

December 23, 2018

Last week, the U.S. Securities and Exchange Commission charged a financial adviser with conducting a classic Ponzi scheme. The fraudsters, a father-daughter team, got away with about $8 million.

In this scheme, the investment of choice was bonds. The targets were, believe it or not, family members of the schemers, as well as their close friends. To make the scheme work, the team created bogus account statements that made it look like the bonds were actually purchased for the clients, but they weren’t. The dad pleaded guilty to criminal charges, and the SEC is pursuing a claim against both of them for fraud, seeking the return of ill-gotten gains, with interest, as well as financial penalties.

To read more about this Ponzi scheme, go to sec.gov/news/press-release/2018-283.

You may be thinking, “Can I fall prey to fraudsters?” Hopefully not, if you are alert to warning signs. Let’s go through them together.

No risk or lots of reward

Imagine if you could take the risk out of an investment and provide an outsized reward on a consistent basis, year after year, while the financial markets were in disarray. What if you could guarantee those results? Who wouldn’t be attracted to that proposition?

While there are some legitimate financial products and services that strive for this ideal result, anyone enticed by such an offer needs to be very cautious. Know yourself. If you are a novice at investing, you may not realize when an investment is “too good to be true.”

Unregistered sellers or securities

Where things go wrong is when a fraudster, such as an unlicensed or unregistered seller of investments, arrives on the scene. As the SEC pointed out in a recent investor alert, “Most Ponzi schemes involve individuals or firms that are not licensed or registered.”

So, your first line of defense is to look up the person making the offer. Here’s how: Go to investor.gov. That’s the SEC website that allows you to look up the salesperson. Click on “Search the Database” under “Check Out Your Investment Professional.”

One word of caution: Finding the person listed is not enough. Bernie Madoff passed this part of the test.

Aggressive sales ploys

The SEC wants you to be “wary of aggressive sales ploys such as pressure to buy immediately and persuasion tactics such as offering investment seminars with a free meal. Take your time deciding whether an investment is right for you, and don’t give any money until you have confirmed for yourself that the seller is licensed and registered.”

Getting paid

If you already bought the investment and now you are concerned, watch for this: “For investments that you already have, be suspicious if you have problems getting paid or if you are pressured to rollover your investments. Ponzi scheme promoters sometimes try to prevent investors from cashing out by offering even higher returns for staying invested.”

What to read

To protect yourself and your family, be sure to read the SEC’s “What You Can Do to Avoid Investment Fraud,” at investor.gov/protect-your-investments/fraud/how-avoid-fraud/what-you-can-do-avoid-investment-fraud. That document is robust and informative.

Also read the SEC’s “Investor Alert: Ponzi Schemes Targeting Seniors” at investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-ponzi-schemes-targeting-seniors.

Bottom line: Most financial services professionals are honest and trustworthy. Only rarely will you run into a bad apple, as you might in any service engagement. By learning from other people’s misfortunes, you can avoid making the same mistakes.

Think about what attracted you to the offer. Any investment, by nature, involves risk. If there is no risk, by definition, it’s not an investment. As the saying goes, if it sounds too good to be true, it probably is.

On a completely different note: If you know anyone who “loves” his or her 401(k), please have that person apply for the 401(k) Champion Award. For rules and deadlines, go to juliejason.com/award, or email me at readers@juliejason.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.

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