Money Matters

To avoid Ponzi schemes, follow a few simple rules

September 8, 2012 

Q. I have had some friends approach me about an “investment” opportunity. Shortly after that, I read that the company was shut down by the Securities and Exchange Commission and that the N.C. Department of Justice was investigating. Apparently, it was what is called a Ponzi scheme. What is a Ponzi scheme and are there general rules of investigating these types of investments?

A. A fellow fee-only financial adviser, Deborah Frazier, MBA, with Frazier Financial Consultants in Chapel Hill, was also recently approached by friends who had an “exciting new opportunity” in which they were involved.

They reported that the potential for monthly income was great, up to 1.5 percent per day with only a few minutes of work. She proceeded to spend some time looking into this opportunity. She was kind enough to share the following steps she took to perform her due diligence, some sound advice and a definition of a Ponzi scheme.

How to sniff out a Ponzi

1. My first stop was to the Better Business Bureau where I found the company had 37 complaints and an “F” rating. That alone was enough, but you may find no history at the BBB.

2. Go to the company website. In this case, the company in question was part of a larger company run by one person.

3. Call your State Security Commission, the SEC or the Department of Justice to ask about the company. In this case, two days after I began my due diligence, the SEC shut the company down for operating a “Ponzi” scheme. My work was done on this one.

4. Long ago, when I was in college, my father gave me a good piece of advice. “Always wait 24 hours before buying in to anything.” We are all susceptible to a great sales pitch.

5. The old adage “If it sounds too go to be true, it probably is” works every time.

This has been around since the first person to get caught operating one: Charles Ponzi, in 1910. Typically, it is something marketed as having greater than reasonable returns. It is usually complicated in its setup. The victim is often unsophisticated or trusting.

In a Ponzi, the original investors are paid generous returns, thus encouraging them to get friends and family in on this terrific investment.

The returns are not paid from company revenues, but from the money from these new investors. If the scheme is not discovered by the authorities, it will eventually collapse, as the obligations to pay out returns exceeds the new investor money coming into the scheme.

A variation: the pyramid

A pyramid scheme can also be attached to a Ponzi scheme, as it was in the case I discussed. A pyramid scheme involves the participants getting others to join. The person asking then gets money for recruiting you.

Be smart, be cautious and talk with people you trust before you join a “too good to be true” opportunity.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 99466, Raleigh, NC 27624

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