Ponzi: An old con snares new victims

Swindler Bernard Madoff may be doing time at the federal prison in Butner, but accusations about new Ponzi schemes keep on coming.

In September, Raleigh businessman Vance Moore II was one of two people charged by federal prosecutors with cheating investors out of at least $80 million in a scam involving automated teller machines.

Earlier this year William Wise, also of Raleigh, was accused of an $80 million Ponzi scheme in a civil complaint filed by the Securities and Exchange Commission. And a group of 17 investors contend two Wake County business partners cheated them out of millions "in a Ponzi-scheme-like-manner." The partners contend their real estate investment ventures are legitimate but have tanked because of the recession.

A Ponzi scheme, also known as a pyramid scheme, is often described as a fraud in which a lot of Peters are robbed to pay a few Pauls. Investors who think they are getting fat returns on their investments actually are being paid out of funds provided by new investors. It's a house of cards that is doomed to collapse.

"It is all about greed and taking advantage," said Beverly Baskin, CEO of the Better Business Bureau of Eastern North Carolina. "They appeal to people's need or desire to get rich quick."

It's unclear whether Ponzi schemes are more popular among the criminal element than they have been in the past. But experts say we're seeing more Ponzi headlines because the recession has made it more difficult for con artists to attract new investors, causing the schemes to unravel.

"It takes more money going in to sustain the scheme," said N.C. Secretary of State Elaine Marshall, whose office enforces North Carolina securities laws.

Here are some key things you need to know about Ponzi schemes and how to avoid getting burned:

Beware of guarantees. Fraudsters like to guarantee high returns. "They promise too-good-to-be-true earnings," Baskin said. "That's a red flag."

William Brock of Denver, N.C., whose $340,000 investment in a company called Mobile Billboards was wiped out when it turned out to be a Ponzi scheme, found the allure of high returns irresistible.

"It sounded real good," Brock said at a news briefing on investment fraud last month. "The rate of return was 13.49 percent."

Understand it or forget it. A common modus operandi among scamsters is to skimp on the details -- because, in truth, there are no details.

"If you don't understand how it works -- in other words, how it makes money -- you shouldn't invest," said John Gannon, senior vice president of investor education at the Financial Industry Regulatory Authority. That applies to legitimate as well as illegitimate investments.

In the Madoff case, for example, "I have yet to hear an investor who has been interviewed with respect to that scam being really able to articulate what they were investing in," he said.

Madoff bilked clients in a $65 billion swindle, including roughly 30 investors from North Carolina.

Credibility is cheap. Technology has made it easier than ever for swindlers to look legit.

"For a couple of thousand dollars, anyone can put up a nice-looking Web site," Gannon said. "That immediately creates the aura of a legitimate company."

Your pal may be an (unwitting) accomplice. Early investors in Ponzi schemes typically earn returns worth bragging about -- and they do brag. So friends get sucked in.

"That's what makes them so gut-wrenching and horrible," Marshall said.

Check with regulators. Swindlers, and the investments that they hawk, typically aren't licensed. You can check if they are, or if any disciplinary actions have been taken against them, by calling the secretary of state's securities division at 800-688-4507.

Even out-of-staters have to be licensed in North Carolina if they are selling investments to state residents.

A cautionary note: Some scamsters will tell you licensing isn't required.

"Do you think crooks are going to tell you the truth?" Marshall asked.

Watch out for the latest investment fad. The underlying structure of Ponzi schemes hasn't changed since 1921, when Charles Ponzi promised investors a 40 percent return in just 90 days. But the investments touted today run the gamut from precious metals to earthworm farms.

"It is kind of the topic du jour, and somebody builds a scam around it," Marshall said. Scams that revolve around alternative energy are especially popular right now.

Bye-bye bucks. After a Ponzi scheme unravels, authorities may recover only pennies on the dollar, if that, to compensate victims. The problem: Scamsters are as good at spending millions as they are at raking them in.

"Telling folks they can't get their money back is always a hard thing," Marshall said.

Regulators doing more. Meanwhile, state regulators recently joined forces with AARP and the FINRA Investor Education Foundation to launch an "Outsmarting Investor Fraud" educational campaign.

The Secretary of State's office also beefed up staff training and equipment at its "cyber lab" for scrutinizing computer files recovered from scamsters of all types. And it shifted three staffers from other departments to the securities division to focus on establishing a paper-and-digital trail that can aid investigators.

When in doubt, get help. If an investment opportunity raises red flags or sounds too good, contact the Better Business Bureau at 919-277-4222 or www.bbb.org for information. "It doesn't matter where it is," Baskin said. "We can do research and look it up for [potential investors]."

Or check the Financial Industry Regulatory Authority's "scam meter" at www.finra.org/meters/scam. Answer a few simple questions online, and it will tell you if the investment you're considering might be a scam.

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