How to avoid being suckered by scams and Ponzi schemes

Caution triangle-980Investment scams can happen to anyone. They’re often very sophisticated. The people involved sound credible and the websites look very professional, usually including testimonials from other investors. It can be hard to tell a scam apart from a genuine investment opportunity.

Warning signs to look out for

The Financial Markets Authority (FMA) advises that an 'investment' is likely to be a scam if you experience any of the following:
  •  
  • Someone you don’t know contacts you about an investment opportunity.
  •  
  • You’re promised very high returns, with little risk. These promises are nearly always too good to be true.
  • The person/business gives you little or no information in writing. All legitimate investments must have documents explaining the investment.
  •  
  • You’re told the offer is known only to a select few and should be kept a secret. This is often a ploy to make you feel special and to stop you speaking to a financial adviser or the authorities.
  • You’re promised access to 'secret' overseas banking markets supposedly offering very high returns - these markets don't exist.

Ponzi schemes are so named after Italian Charles Ponzi who ripped off investors in the US in the 1920s and forever had his name associated with those types of scams. They involve early investors being paid their promised profits from money put in by subsequent investors and are unsustainable long-term as they don’t actually earn any money.

Serious Fraud Office Director Julie Read says Ponzi and other fraud schemes tend to be more active at times of low interest rates when savers are looking for higher returns than offered by the banks.

She elaborates on the FMA comments and says there are nine early warning signs investors should check before committing their money to investment schemes.
  1. The adage “if it looks too good to be true, it probably is” holds true. Are the promised profits realistic?
  2. Be wary if the scheme operator refuses to give out information on it.
  3. If the scheme is offering consistent monthly returns, that should be a red flag, Ms Read says. Bernie Madoff, the architect of the US’ largest ever financial fraud, offered investors consistent monthly returns of 1-1.5% for 20 years despite markets going up and down over that time. Even the best traders lose money from time to time and legitimate investment schemes should warn investors they may also do so on occasion, she says.
  4. Madoff told investors their investment returns were the result of a proprietary split-strike conversion strategy without ever explaining what that was, inferring to those that asked it would be too difficult to understand. Good investment companies will explain their strategy, Ms Read says.
  5. Another warning sign is when investments are based on whisper rather than standard marketing. Investors should avoid schemes sold by word of mouth by early investors who act as ambassadors and are said to be exclusive to only certain people.
  6. Madoff regularly accounted to investors what was happening with their money, sometimes issuing up to 30 to 40 statements a month, Ms Read says. But the statements were always on his own letterhead rather than that of the institutions he claimed to have invested the money in. Investors should look for relevant reports from the particular funds the money is said to have gone to.
  7. Expect legitimate schemes, especially one the size of Ross Asset Management, to have a reputable auditor (something that Ross Asset Management did not have).
  8. If you’re not an experienced investor and are unsure about posing these sorts of questions to the scheme offeror, hire an authorised financial advisor who can do so on your behalf.
And if the scheme you’re in starts to look dodgy, get your money out as early as you can. The moral of the story should be: Give the team at Milestone a call before even remotely considering any investment. Our job is to not only get you a return ON your money, but to also ensure that over time, you achieve the return OF your money.