YOUR MONEY: Ponzi perpetrators exploit some common misperceptionsDespite billion-dollar Ponzi frauds on Wall Street, in India and elsewhere, David Shapiro thinks most people misunderstand such schemes. Shapiro, an economics professor at the John Jay Center on Media, Crime & Justice at Central University of New York, has been an FBI agent, a state prosecutor and a forensic accountant. He's put together 10 myths and facts about Ponzi schemes to better educate the public and media about them:
By: Andrew McIntosh, McClatchy Newspapers
NEW YORK - Despite billion-dollar Ponzi frauds on Wall Street, in India and elsewhere, David Shapiro thinks most people misunderstand such schemes.
Shapiro, an economics professor at the John Jay Center on Media, Crime & Justice at Central University of New York, has been an FBI agent, a state prosecutor and a forensic accountant.
He's put together 10 myths and facts about Ponzi schemes to better educate the public and media about them:
MYTH: Ponzi schemes are pyramid-type frauds that involve "robbing Peter to pay Paul," including those that begin when legitimate businesses run into trouble.
FACT: Ponzi schemes are conceived as criminal enterprises from the outset. Charles Ponzi's original scheme in Boston consisted of setting up a sham business, with no money of his own, specifically to defraud investors. He promised a 50 percent profit in 45 days through a murky investment few understood - postal coupons from overseas. A few early investors made money, allowing Ponzi to entice thousands of others. The Italian immigrant used most of the cash invested in his company to support his lifestyle, until a Boston newspaper exposed him as a fraud who had earned a criminal record in Canada. He was convicted of mail fraud in 1920.
MYTH: Ponzi predators target only the rich.
FACT: Investors of many income levels have been victimized by Ponzi perpetrators. To a Ponzi scammer, investors with few resources are easier victims. They're least equipped to defend themselves once duped.
MYTH: Ponzi schemes are quickly detected.
FACT: Schemes may go undetected for 10 or more years. Ponzi schemers thrive as long as new money flows in, whether from loans, new investors, or new money from old investors, to cover redemptions.
MYTH: Ponzis are distinguished by paying old investors with money from new investors.
FACT: Commingled money from old and new investors may be used to pay redemptions. The threat to a Ponzi is the demand to make good on the overstated rates of return promised to investor-clients.
MYTH: Ponzi predators are motivated solely by "the high life."
FACT: The Ponzi architect enjoys deceiving others into surrendering money, while continuing to enjoy the unsuspecting victim's admiration.
MYTH: An investment firm's registration with the U.S. Securities and Exchange Commission shows that its investments are above-board.
FACT: Registration alone does not allow an investor to safely conclude that the promoter is acting in good faith. History is replete with duly licensed Ponzi predators.
MYTH: Offshore investments provide high returns and domestic investments offer low risk.
FACT: The Ponzi perpetrator exploits these common misperceptions. Whether an investment is offshore or domestic has nothing to do with risk involved or potential profits.
MYTH: Ponzi operators use only private marketing efforts, such as seminars, to lure investors.
FACT: Fraudsters are now using publicly available means, such as sophisticated Web sites, to attract investors as victims.
MYTH: All investments pitched as certificates of deposit or CDs are safe and insured by the Federal Deposit Insurance Corp.
FACT: Ponzi operators often pitch schemes as high-yielding CDs, exploiting the belief that CDs are safe bets. Not all of them are FDIC-insured.
MYTH: Investments held by independent custodians are protected from Ponzi predators.
FACT: Ponzi operators have used legally independent parties to hold investor money.