A Special Birthday Reminder

~ By Gerald Rome, Colorado Securities Commissioner ~

March 3rd marks a special day here in the securities world, though it’s not necessarily a cause for celebration. That’s because March 3 is the birthday of the most notorious securities fraudster to date, who even earned a self-titled scam. That man, of course, was Charles Ponzi.

Gerald Rome, Colorado Securities Commissioner

Gerald Rome, Securities Commissioner

Born in 1882 in Italy, Ponzi’s life followed the trajectory of many white collar criminals. In the 1920’s, he came up with a scheme where he would promise investors – many of whom were fellow Italian immigrants who spread word among their social circles – huge, guaranteed returns on their investments. Ponzi was bold and unashamed enough to promise a 50 percent returns in 45 days or a full 100 percent return within 90 days. With money from the flood of initial investors, he was able to pay these returns, generating more investments, but only for a time.

Of course, this is how the now-famous Ponzi scheme works: instead of a legitimate investment plan that generates real returns, Ponzi schemes simply pay early investors with the funds contributed by new investors. As the early investors get their promised windfalls they continue to spread word of their good fortune, fueling more “returns” from new investors. However, even with Bernie Madoff’s billion dollar scheme, new funds always eventually slow to a trickle, the scheme collapses, and the most recent investors end up with zero returns while the schemer has made out like a bandit.

Ponzi was able to con over 30,000 people into investing over $20 million in today’s money, making him a very wealthy man. Eventually, he was caught, and served time in prison before being deported back to Europe where he died. But his legacy lives on through the common scams that we still investigate and prosecute today.

So what can we learn from Ponzi? Unfortunately, his namesake scheme remains one of the most difficult for investors to identify. However, there are some easy ways to decrease your chances of becoming involved in a Ponzi scheme.

1) Never make investment decisions based purely on word of mouth, even if it’s from someone you trust. Many Ponzi schemes are furthered through affinity fraud, as with the original Italian-American community duped by the man himself. If someone lets you in on a promising deal, don’t commit to anything until you’ve called the Division, or at least run the offering and it’s seller through brokercheck.org and Securities and Exchange Commission. Often people spread word of a scam when they themselves are also victims.

2) I know you’ve heard it, but repeat it over and over again to yourself until it’s second nature: “if it sounds too good to be true, it probably is.” Ponzi schemes gain success by promising (and initially delivering on) high returns with little to no risk. Fraud fighters call these promises “phantom riches” since they appeal to the human desire to get rich quick. Just know that if someone is making you promises like this, there is likely a good reason to run the other way.

As always, if you ever have questions about an investment offering, the Division of Securities staff is here via our main line at (303) 894-2878 or through the new DORA Senior Hotline at (720) 593-6720.


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