By Mike Lazear: PIC Current Assistant Producer
Bernard Madoff, a force in the investment market, was arrested recently for running a Ponzi scheme last week. If you have not heard the news, check out this article. If the allegations are correct, he actually manged to scam people out of $50 billion in investments.
Amazing!
A Ponzi scheme, is basically the same as a pyramid scheme. The idea is that the early investors in the scheme, and the person who actually created the scheme, are the only ones to benefit.
Basically, the creator of the scam promises guaranteed and very rich payouts. At first, the scam pays out as early investors get their rewards from the money of later investors. This attracts even more investors.
The whole comparison to a pyramid comes from the fact that only people at the top make any kind of profit and there are fewer of them. Once you get further and further down the pyramid, there are a greater and greater number of investors, but their income is less and less because the model is unsustainable. At a point there is not enough capital invested in the system to support huge returns for all the people who buy in and it will collapse.
How can you spot one of these scams before it is too late for you?
Signs that a business or investment opportunity is a Ponzi or Pyramid scheme:
- Promise of large and guaranteed returns for your investment very quickly
- Little or no effort required on your part to run the business or manage the investment (in other words, it is automatic)
- If it is a business package, weak or no description of what products the business offers or even what it does
- MOST IMPORTANT: a “requirement” to get others to invest in the business, product, or investment in order to make a profit yourself
Not all businesses or investment opportunities that fit some of these descriptions are pyramid schemes, but a lot of them are. It is important that you really familiarize yourself with the source before committing your hard-earned money to anything. Make sure that you can trust it. Believe me, it is not always easy to identify some of these scammers. It is often better to walk away from a legitimate business opportunity than it is to fall prey to a real Ponzi scheme. Keep this in mind if you are even on the fence.
For more on Ponzi and Pyramid schemes:
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