One of the simplest yet most effective investment scams is the ponzi scheme. The promoter promises investors a return on investment and says it is secure, but there is no real ‘investment’.
The promoter convinces people to invest with their scheme. They then use the money deposited by early investors to pay the first ‘dividend’ until investors feel comfortable and decide to invest more. Some investors then encourage their family and friends to join. Eventually the scheme falls apart because the promoter starts to spend the money too quickly or the pool of investors dries up.
Here are tips on how to pick a ponzi scheme from a real investment.
- The rate of return is sometimes suspiciously high (maybe as high as 10% per month or 120% per year) – but it can also be just the usual rate of return
- The person who tries to recruit you is someone you think is trustworthy, like a neighbour or someone in your church or community group
- The recruiter may have already invested in the scheme and received great dividends
Read ASIC’s media releases about the conviction of ponzi operator Chartwell Enterprises, and a penalty and ban issued to ponzi ‘mastermind’ David Hobbs.
Case study: Maria invests through a friend
First-time investors Maria and Jason borrowed $70,000 to invest in the overseas money market after a recommendation by their friend of 40 years, Steve.
Steve told them their investment would involve no risk at all, as it was guaranteed by the Bank of America. He said they could withdraw their capital at any time after the first 12 months. The return promised on the investment was fantastic (26% per year on their initial investment). Steve helped the couple arrange to borrow the $70,000 they would invest.
But the scheme was not real – they were caught up in a ponzi scheme. Part of the money they and other early investors deposited was used to pay their first dividend cheques. When the money for dividends dried up, Steve said that it was due to the interference of ASIC. This was one of many false stories fed to the investors by Steve, to keep them onside.
Jason and Maria were angry with ASIC as they thought the organisation was ruining their chances of making money from their investment. They wanted to believe Steve, as they didn’t want to think they had lost all their money, and he was an old friend.
When the truth eventually came out that the scheme wasn’t real, Maria and Jason, along with the other investors, assisted ASIC’s investigation and prosecution of Steve and his business partner — who spent more than 2 years in jail.
Maria and Jason lost their $70,000 and ended up having to pay off the loan. When Jason’s mother died, his inheritance was completely swallowed up by the $70,000 debt plus interest.
Jason and Maria are now very wary, and warn others to get a second opinion from a licensed financial adviser before investing in anything.
This is a true story – only the names of the investors have been changed at their request.
Operators of unlawful investment schemes sometimes target community groups, like churches, to find victims. In some cases, members of the community group innocently encourage others to put money into the illegal scheme.
This means that when the scheme collapses, not only do the investors lose their money, but relationships break down between friends, neighbours or community group members.
Ponzi schemes targeting Thai communities
ASIC Victorian Regional Commissioner Warren Day talks to SBS about how members of the Australian Thai community are falling victim to Ponzi scams operated through Facebook.
Warren Day interview on SBS (23 mins)
If the promoter of the scheme is disciplined about how much money is left in the account to pay ‘dividends’, the scam can go on for many years. Ponzi schemes only require a few people in their early stages to be successful.
An example of how a ponzi scheme works is shown in the table below. In January, the promoter convinces Katie to invest $100,000 in his scheme. The promoter then pays Katie $10,000 each month using Katie’s own money.
As Katie receives $10,000 each month she doesn’t suspect anything is wrong, and happily recruits friends and work colleagues to invest, too. After 3 months, Katie’s neighbour Adam decides to invest $100,000 after hearing about Katie’s great returns.
After both Katie and Adam have invested their savings, the returns continue to come in April. But in May they don’t hear anything from the promoter. They try to contact him but his number has been disconnected.
The promoter has taken off leaving two devastated people in his wake. Katie lost $70,000 and Adam lost $90,000. The promoter got $160,000 out of the scheme.
This is example has only two victims but in reality these schemes can have dozens or even hundreds of victims.
Katie and Adam invest in a ponzi scheme
|March||$10,000 returned||Invests $100,000|
|April||$10,000 returned||$10,000 returned|
|May||No contact||No contact|
The power of a Ponzi scheme
In this episode we take you behind the scenes of a Ponzi scheme where unbelievably good returns are offered to investors, the scheme operator seems to be trustworthy – but it’s all smoke and mirrors.
ASIC investigators Kaan Finney and David McArthur explain how Ponzi schemes work, how operators attract investors, how ASIC investigates and shuts down these schemes and most importantly, how can you can avoid getting caught up in a scheme.
- Stop investing any more money
- Check if the company is on our list of companies you should not deal with
- Check the company’s licence number on ASIC Connect’s Professional Registers.
- Report the scam to ASIC
ASIC may be able to prosecute the ponzi scheme operators if they are operating in Australia. ASIC may also be able to issue an alert about the scheme. You should also warn your family and friends, to stop them from becoming victims.
The biggest telltale sign of a ponzi scheme is the suspiciously high rate of return. That old saying applies here: if it sounds too good to be true, it probably is.
Before you invest in any scheme, do independent checks to see how the returns are really going to be made. Don’t just trust the word of the person selling you the scheme.
Reprodued from ASIC Moneysmart website