Ponzi Schemes: The Fast Track to Losing Money

Before chain letters and the Internet age was the Ponzi scam, a con developed by Charles Ponzi. Born Carlo Ponzi in 1882, he made headlines in the 1920s when the pyramid-like scheme he created collapsed, leaving thousands of "investors" at a loss.
 
Like modern day schemes, Ponzi's promised investors more than double their investment in a quick period of time with little risk. The plan involved cashing in on the strength of the American dollar by exchanging lower-valued foreign postage coupons for United States ones.

Modern-Day Ponzi Scheme Gift Networks

The popularity of networking schemes shows that history does indeed repeat itself. Today, a ponzi scheme gift network attracts people with similar get rich quick promises. On the surface, this type of con seems like a legitimate investment in a product or service. However, over time, it proves to be a scam. The effects can be devastating for the poor investor who uses his life savings hoping to retire early.
 
In many ponzi schemes, the top few "investors," usually the people who started the scam, are the only ones to walk away with any financial gain.
 
Some ponzi scheme gift networks give the appearance of turning profit. In these cons, investors initially receive a small return. The truth is they are really being paid back with their own money. This is to lure them into investing more money in the scheme. By the time they realize the product or service in the ponzi scheme is extremely overvalued, it is too late, and their investment is completely lost.

Avoiding Ponzi Schemes

The birth of the Internet age and fast-moving developments in the technology sector has made it very tempting for people to jump on the investing bandwagon. However, before you rush to get in on the next hot investment, here are some ways to spot a genuine deal from a ponzi scheme:
  • Check the institution: Legitimate investments are usually regulated or at least have the careful eye of a third party that has no interest in the investment. Mutual funds, for example, can be checked for authenticity by making sure they are registered with the Securities and Exchange Commission.

  • Skip the tips: Unless you trust your friend with your family's savings, go to a genuine financial advisor when looking for a sound investment. If you're still interested in your friend's tip, ask the financial advisor for more information.

    Chances are it's more a scheme than a moneymaker if they don't have documentation to give you or swear it can only be done through "word of mouth." If they do provide you with paperwork, always have an independent financial advisor review it.

  • Understand the risks: "Too good to be true" is a good way to sum up the profits promised by ponzi schemes. Many people choose to invest in high-risk markets, hoping for a big payoff. The main difference is they understand the level of risk involved and usually conduct the transaction with a legitimate investment firm. Ponzi schemes, on the other hand, attract investors with the promise of huge profits with little risk of losing their money.
Resources
 
Clements, Leonard (1999). Pyramid, Ponzi and Network Schemes: Is One Hiding Behind Your MLM Program? Retrieved March 17, 2008, from the Inside Network Marketing Web site.
 
Cuthill, Jr., R.W. (2007). Fraud – Beware of Ponzi Schemes. Retrieved March 17, 2008, from the Ezine Web site.
 
Thompson, Judy (2005). Cycling Programs and Ponzi Schemes. Retrieved March 17, 2008, from investment money blog Web site.
 
U.S. Securities and Exchange Commission (n.d.). "Ponzi" Schemes. Retrieved March 16, 2008, from the SEC Web site.
 
U.S. Securities and Exchange Commission (n.d.). Pyramid Schemes. Retrieved March 17, 2008, from the SEC Web site.