How to Avoid a Ponzi Scheme and Investor Fraud

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By MarieSteris
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Avoid a Ponzi Scheme and Investor Fraud

Lets come out and say it; most everyone loves the idea of making money and a good deal of it if possible, especially with the cost of living constantly on the rise. One way that people have sought to gain substantially over the years is through stock investments. As long as people have been interested in investing in stocks, there have been people with an interest in investing that money for them. The problem is that not all are legitimate. One common form of investor fraud is referred to as a 'Ponzi scheme' or a 'pyramid scheme'. These tips are intended to help protect investors from falling victim to stock fraud.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

Time to do some research
Access to the internet

Step 1

Charles Ponzi, 1910; Originator of the Ponzi Scheme

First it is helpful to understand what a Ponzi scheme or pyramid scheme is. The old adage 'borrowing from Peter to pay Paul' applies here. A Ponzi scheme is a fraudulent investment scam that uses the money from some investors to pay other investors to make it appear that they are profiting from the investment. A constant stream of new investors are a must for a Ponzi scheme to work. These investors are typically sold on the promise of unusually high and quick profits.
Step 2

If it sounds to good to be true than it is more than likely either, too good to be true or too good to be legal. It is very easy to become intoxicated by the possibility of becoming 'wealthy' virtually over night. However, keep your senses about you and don't leap before you look...extremely close.
Step 3

According to Federal and State Securities laws all brokers, investment advisers, and their firms are required to be licensed or registered, and to make important information public. With this in mind, before you invest with anyone, you can go to the US Securities and Exchange Commission website and look them up for free. You can also check with the National Association of Personal Financial Advisors, the Financial Planning Association and the Certified Financial Planner Board of Standards. Unfortunately, you still have to be leery. Not every broker who is registered and appears to be a legitimate investor is.
Step 4

Research the potential broker. Try to locate and talk to people who have invested with this person before. Don't pry into their personal business but rather ask about their experiences with the broker. Ask questions such as 'how long they have invested with this person', 'were they paid in a timely fashion when asking for dividends', and 'do they receive statements of their account'.
Step 5

Visit the broker at his or her office. It may be beneficial to do any and all business at the borkers office rather than over the phone or out of the office.
Step 6

Make sure that all statements and paperwork come directly from the brokerage firm that the broker operates out of. If you are feeling the least bit concerned, remember this is your hard earned cash and you can call the brokerage firm and verify the numbers in your account and the paperwork in your possession.
Step 7

Be very leery of any broker that asks you to make checks out in his or her name.
Step 8

Be very leery of brokers and investment opportunities that claim 'guarantees' and 'no risks'. According to the US Securities and Exchange Commission, "there are no guarantees" when it comes to stocks.
Step 9

Whatever you decide to do, its still probably a good idea to avoid putting all your eggs in one basket.

Comments

WesleyJ said

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on 1/18/2009 Interesting..isn't the pyramid scheme used by yuwie and zenzuu also? Absolutely 5 star research..saving this one, as well as recommending you :]

ethoslogos said

on 1/18/2009 How to avoid a Ponzi scheme and investor fraud is important for everyone to know. There are a lot of criminals out there anxious to take us to the cleaners!