10 Ways to Spot a Ponzi Scheme

He barked, “Don’t you have a family?” I thought, wait a minute, he was trying to convince me to join something I know nothing about and where his description was, at best, vague.

10 Ways to Spot a Ponzi Scheme
Photo by Gwendal Cottin / Unsplash

This lengthy blog could save your life. So, read the whole thing.

A business associate of mine calls me regularly to sign up for a workshop, always noting how it will help me understand the economy and investments. I would then delve into conversations about my thoughts on the economy and investment, hinting to him that I may be more useful as a speaker at one of his workshops rather than a participant. I am an economist, and I am interested in the economy and investment. He would ignore me and press on with the sales pitch. There was something niggling at me, but I could not put my finger on it. Then, in one conversation, he snapped at me after I agreed to spend two days in his seminar since it was online.

Here is how the conversation went. After his sales pitch, I replied, “I don’t think I am the right audience for this seminar.” ,Yet, his selling game was to insult me? I thought, “This was too much of a hard sell.” I told him to send me some information and the invitation. Then, I did some online research. After about 15 minutes, on their website and that of partner companies, I found a court case where someone was suing them for fraud. The person lost about $350,000. I soon learned why I had a niggling feeling about this VIP-only invited workshop. They are a collaborative network of a Ponzi scheme. This explains my associate’s hard sell and constant badgering about attending the event.

World-famous Ponzi Schemes

Before I look at ways to spot a Ponzi Scheme, we need to be clear on what one is. The scheme is named after Charles Ponzi, an Italian who came to America in 1903 and, by 1920, landed in jail after defrauding investors of about $7 million. He provided earlier investors with returns from later investors, making those at the top believe they were in winning investments. Meanwhile, investors believe the ‘portfolio manager was legitimately investing their money.’ It falls apart when there are not enough new investors to keep the cash coming in. World-famous Ponzi schemes have included the former American financier, Bernard "Bernie" Madoff, and one I followed and suspected for years, Allen Stanford. I recall when Stanford had multiple businesses in Antigua. My friends would encourage me to seek a job with one of his companies because he paid well. I also knew he treated Antiguans with impunity, so I could not work for someone with such poor character. Due to my distrust, I never opened a bank account with his bank, although I was tempted to apply for credit cards. Despite my suspicions, I did not know just how flawed his character was.

Similar to a Ponzi scheme is a pyramid scheme. It is more difficult to prove fraud since, at the surface, it seems like a regular club of smart sellers that have the inside take on something special. In both cases, it helps if the leader is charismatic and generally larger-than-life. People love to love these people because their self-confidence seems like honesty. Some multi-level marketing companies have been called pyramid schemes because of their structure. They operate by bringing in more and more consumers who double as sellers, with those at the top making more money than those at the bottom. They promote the business by growing club membership and promising that if you work hard enough, you too could be rich, like the smiling and successful people in the videos and pictures shown during the workshops.

Is it Multi-level Marketing or a Pyramid Scheme?

I, too, was caught up in one of these “multi-level marketing” companies as a teenager when I was looking for business opportunities. They sold what they considered superior cleaning products. They still exist today. I bought one bottle of bathroom cleaning concentrate to test the product and went to a few workshops. However, when I saw the head guy for my island with his garage filled to the ceiling with these overpriced products, my intuition told me something was wrong. He was buying to remain a top-tier salesman—gold or platinum level—because the island, Antigua, was too small to build a network of people under him to sell and consume products that were far more expensive than the standard grocery store cleaning products.

Since then, I have come across many pyramid schemes selling supplements, real estate, alkaline water, weight-loss pills, cosmetics, and vacuum cleaners. I avoid them like the plague, whether they are outright investment deals, like Stanford’s 15 percent guaranteed Certificates of Deposits (CD), or just multi-level products selling.

10 Ways to Spot a Ponzi Scheme

Here are my ten ways of spotting Ponzi schemes or pyramid schemes before they take your money, time, and mental health.

  1. Hard Sell. The person introducing you to the scheme will not tell you it’s a Ponzi or Pyramid scheme because those words have negative connotations of defrauding people. They will tell you how great this opportunity is and remind you that they don’t allow just anyone in, but you are being invited because you are unique. We all want to feel like we are special. That’s human nature. Being in a club of super-smart investors or salespeople, getting rich while others toil, makes us feel like we could get there. It helps when they show videos and pictures of others who have gone before and have all the material trappings of success - jets, sports cars, suits, big houses, etc. My ears perked up when my associate told me I should be smart enough to know if I have a family, then I should be in his workshop. He was using the strategies he learned during his indoctrination.
  2. Vague on how you will make money. There is lots of emphasis on membership, camaraderie, and the leader “contributing” their time to you because out of the goodness of their heart, they want the world to become successful like them. They also focus on the end goal of how financially liberated you would become. You must sell more than anyone else, and you will make more money. Then, your sponsor makes a percentage of what you make. For a Ponzi scheme, they will tell you that you could earn high yields above the market rate. Why and how? Simple. They, the portfolio manager, have inside knowledge that no one else has. They are just uniquely brilliant. Their charisma and charm make you trust them. Their family is involved. In the case of my associate, I was instructed to bring in my partner as well. They were all there with their families. Despite all this, there is no clear line between what is being produced and why it would yield returns above the market. The strategies remain secret or non-sensical when trying to explain them to someone else.
  3. What's the product or service? Money is a medium of exchange for a good, service, or intellectual property that you or someone else needs or desires. You may earn points from a grocery store when you buy, but the main point is they are selling you foodstuff, not points. The points are to build loyalty and provide data on what you buy. A Ponzi scheme often sells the dream of wealth, the lifestyle, the levels, and the “points” more than the product or service. You are encouraged to sell more to gain the points because those points lead to a level that proves that you are successful to other club members. If you have to think too hard about what they are selling, or you can’t explain it to someone in simple terms, watch out.
  4. The sellers and top-tier people are often super charismatic and great speakers, with many people and fans cheering them on as if they were celebrities. They are like a used car, snake oil, and fire-and-brimstone salesman wrapped up in one package. Their ego feeds on the spotlight. They talk as if they are in some insider's club, and anyone who does not believe them or wants to be part of it is a fool. “You don’t have a family?” To seem wise, you join the club because anyone seeking value in themselves will want to join to prove that they are brilliant. Soon, they will casually ask you to prop down thousands of dollars to begin to be part of this elite group. Don’t worry; they will tell you that your returns will make this look like peanuts. I wrote about people valuing themselves in another blog.
  5. They typically try to get the whole family involved. That way, they seem like a family-oriented company, unlike many capitalist companies just bent on making money. One spouse does not need to go home and convince the other. Both become convinced together. Typically, having one spouse who has to sell the idea to another is good. If it’s so hairy-fairy that it’s hard to explain, maybe it’s not worth the risk, or more research is needed. Also, stay away from these schemes in the moments when you are pressed for money. Lack of money seems to make us irrational and take more risks when we should become more frugal when we are in a money crunch.
  6. Because they are privately owned, you won’t see their books. You don’t know what they do with your money, and they will even make you borrow to invest with them. They care little for your budget or plans for the future. One scheme I came across encouraged people to use their credit cards to borrow about $50,000 to buy their top-secret spreadsheets and tools that would make them so much money, some vague time in the future, you could pay it back. When they went through the exercises on how you made money, there was lots of fast-talking from the “successful” instructors, rendering group think on their audience. Stanford had his accountants make up false statements to their 50,000-plus investors. Look for errors in any notices you receive. Make sure they arrive consistently and are available on demand. Look out for those who are not registered with the Securities and Exchange Commission (SEC) or are unlicensed sellers of securities of some version of equity. If they are unregistered or unlicensed, you can’t check them. If you can’t see their annual income statement and balance sheets and cannot access them, then why put your hard-earned money into it?
  7. False Ownership. The person attempting to bring you in often behaves vaguely as if they own or are one of the company's owners. That’s what their “leader” tells them. In pyramid schemes, they tell you that you own your business. They hope that your independence spares liability. When you dig deeper, people are sales agents without any benefits or obligations from the parent company.
  8. The Promise of Low-risk and High Returnsbehaves. Standard promised CDs with returns of around 15 percent, guaranteed. Beware. No matter how clever the insider is, a high reward is permanently attached to increased risks. One of my former supervisors, a brilliant economist and former advisor to governments of significant countries, lost over $200,000 investing in Stanford’s CDs. Even insider trading, which may offer high returns, has an increased risk of going to jail. The financial world and most things work this way. Treasury bills or government bonds provide low risk, so their returns are low. You will at least get back what you put in. A risky investment like the lottery has odds of one person in a million winning, so you will most likely lose your money.
  9. They are selling you the best option. There are always options in life. Don’t let the salesman sell you products through a pyramid scheme or a Ponzi scheme that tells you their approach is the only way to meet your dreams. Also, you should have your financial plan. Leave it if their ‘opportunity’ does not support your program. It would be best if you had long-term goals, and while you tweak them, stick to them. I recall an old friend getting caught in the we-have-a-million-dollars letter. He sent the people a few thousand dollars before I explained how he was being scammed. He was in a money crunch because he was repairing his guesthouse, and they made him believe theirs was the only way.
  10. If it sounds too good to be true, it is not. Promising high, consistent yields in a fluctuating market is unrealistic. Very few humans are kind-hearted enough to want to share secrets that make them money. Why would he need investors if Standford was producing 15 percent on CDs? He could keep accumulating cash for himself. Also, follow their trajectory. I always felt Standford rose too fast without knowing what he was selling. Watch your greed and need level. Stick to your plan, and don’t be sidetracked by someone else plan.

These are my ten ways to spot a Ponzi or Pyramid scheme. Tell me what happened if you have ever been caught in one of these. Also, do you have other ways to spot one of these schemes?