Unbelievable returns might mask a Ponzi Scheme

Another fraud?

The news that Sir Allen Stanford [1] has been charged with the massive investment fraud [2] should ring alarm bells for many who have investments in arrangements with uncharacteristic returns that are not reflected in the market in general.

Only a few months ago, Bernard Madoff was caught or rather acquiesced in running a large investment scheme [3] that apparently amounts to a Ponzi scheme [4] that might cost investors well over $50 billion.

Taken by the takers

There is no doubt that certain personalities with larger than life portfolios have blindsided regulators all around the world, offering better than normal rewards for investments from investors who believed they belonged to an exclusive club of market makers where they have the inside on how to make serious money.

Many [5] have swooned at the genius and spell of these Midas moguls who seemed to have turned lumps of investment coal into gold and diamonds returns.

Early results and persuasion compel their customers to pour more of their fortunes into these investment vehicles built on the promise of unbelievable profits – the returns should have been unbelievable but many believed and desired beyond all to be involved.

The England and Wales Cricket Board were suckered into this grandiose circle [6] of wealthy patronage as they negotiated with Sir Allen for the big money stakes of Twenty20 Cricket [7] tournaments against the Stanford Superstars.

Can you get out now?

I do not know if people already roped into many yet undiscovered schemes have the ability now to withdraw their funds but the warning signs should be clear – any investment offering returns way higher that what you can get on the market without discernable competitive peer comparisons is probably suspect.

Just like the pyramid schemes of old took on new names like Multi-Level Marketing [8] or Network Marketing whilst still operating as the original scams, those amazing investment returns of today can be found in fancifully renamed High Yield Investment Programmes [9] which are essentially bare-faced Ponzi Schemes fronted by seemingly successful, flamboyant, respectable looking people fully integrated in community activities.

Parted from ones money

All appearances of propriety are deceptive and almost Machiavellian in nature, people have been seduced and cajoled but in the end have willingly allowed themselves to be lead by the nose to the point where that they are about to lose more than they can afford to lose.

If I have not made this warning clear enough, people should start examining their investments most especially in African capital markets, the global economic crisis is definitely going to expose how unsustainable these returns have been from the very first day they were conceived and marketed as the Holy Grail of mega investment returns – if your money is not in your mattress it is probably already out of reach.

If a word were enough for the wise, the unkindest lesson to be learnt could be summed up in realising that a fool and his money are soon parted – one would rather not be that fool.

Sources

[1] Allen Stanford - Wikipedia, the free encyclopaedia

[2] FT.com / Companies / Financials - SEC charges Stanford with fraud

[3] FT.com / UK - Madoff agrees not to contest Ponzi civil charges

[4] Ponzi scheme - Wikipedia, the free encyclopaedia

[5] List of investors in Bernard L. Madoff Securities - Wikipedia, the free encyclopaedia

[6] BBC SPORT | Cricket | England | ECB suspends talks with Stanford

[7] Twenty20 - Wikipedia, the free encyclopaedia

[8] Multi-level marketing - Wikipedia, the free encyclopaedia

[9] High-yield investment program - Wikipedia, the free encyclopaedia

HYIP Monitor - The Best High Yield Investment Programs Rating Service

Ten Big Lies of Multi-Level Marketing

List of multi-level marketing companies - Wikipedia, the free encyclopaedia

The 10 Nastiest Ponzi Schemes Ever | Business Pundit

Strategies for avoiding Madoff-like Ponzi schemes -- Newsday.com

Old-fashioned Ponzi Schemes as HYIPs

Making Mo-Sense about money

I have to give credit to Roosevelt at MoThanSkin who has enlightened me on a matter that has quite fascinated me.

I have lately been reading of so-called High Yield Investment Plans (HYIP) in Nigeria where in one instance a bread-winner took her life with rat poison having been swindled out of her entire savings.

The draw of these “Get Rich Quick” schemes that promise outrageous returns not obtainable in any legal business setting is amazing; the person has to suspend belief in financial reality to be involved; though many participants proselytised into these schemes never realise how they are being conned until they have been completely fleeced.

Persuading the greedy

Generally, a person is persuaded to invest a sum for a guaranteed return well above the odds, sometimes 200%, the wary investor tests the waters with a token amount and gets paid in the allotted time.

This emboldens the investor to jump in with both feet, if not borrowing to invest, at which point the investment goes into a black hole and the agency either has tales to tell or the personnel just disappear into thin air.

No shelter for the fool

Considering these schemes do not have regulatory control of financial agencies or customer protection, the need to beware is evident as customers can also be profiled for their greed and gullibility see how much more they can be enticed to part with their money as fools.

The play on words that redefines an old scam as a new financial instrument is interesting, but like I read on MoThanSkin, these are all variations on Ponzi Schemes. At various times know as Pyramid Scheme, Multi-Level Marketing and now the more professionally sounding High Yield Investment Program, Global Currency Arbitrage or Hedge Futures Trading.

They are all like snake-oil remedies that have the bite of a snake and are lethal enough to cause fatalities, both financially and literally.

Playing on trust

The scheme are generally unsustainable over time, relying on new entrants to feed the promised returns of the earlier entrants; eventually, new entrants run out leaving everyone out of pocket apart from the promoters who would have gone to ground and disappeared.

Whilst I am not saying people should not invest in these schemes much as the risk of loss is too compelling to do otherwise, sometimes like the gambler in Kenny Roger’s Gambler, those who have made it have known when to walk away and been intuitive enough to know when to run.

However, if the investor is entranced by initial returns, they should reflect on the standard small print on any financial investment document – past performance is no guarantee of future success, even if it is your very next investment.

Looking out for a scam

These are elaborate confidence tricks that earn your trust and confidence to then scam, defraud and dispossess the victim.

Like Roosevelt notes from culling the Wikipedia entry that I have also quoted below; the characteristics of Ponzi Schemes are simple.

* In a Ponzi scheme, the schemer acts as a “hub” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly (in fact, failure to recruit typically means no investment return).

* A Ponzi scheme claims to rely on some esoteric investment approach, insider connections, etc., and often attracts well-to-do investors; pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.

* A pyramid scheme is bound to collapse a lot faster, simply because of the demand for exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive simply by getting most participants to "reinvest" their money, with a relatively small number of new participants.

Get out now!

Someone somewhere is in one of these schemes who has gained some return from a business model that has no underlying fundamentals and is ready to sell the world to get similar returns but would come completely short and lose everything like the gambler that has gone “all in” against a Royal Flush with just a high card.

Any scheme like this is a sinking ship and you had better bale out or jump like a rat before you go down into a watery grave of the many that belong to the fraternity with the motto – A fool and his money are so soon parted.

Reference

Pyramid Schemes Never Die; Just Evolve