Pyramid
Schemes & Other FraudsOne of the most insidious frauds is the Ponzi fraud, named after Charles Ponzi, who first organized such a fraud in 1919 in the U.S. Investors are urged to put their funds into what appears to be a legitimate effort, such as commodities trading, real estate investing, etc. Those who do so first are rewarded with returns on their investments, so they continue to add money and, more important, tell others to invest. Basically, the scheme is simple: You use the money that is coming in to pay the initial investors back a little bit more each time to try to keep more money coming in. Eventually, the "scheme" goes belly-up and everyone loses their money. Except the person who started the scheme, who absconds with all the funds. It can be very sophisticated, with phone centers, fancy brochures and the like-but you still lose your money.
Another common scheme, which is legal but distasteful, is what I call the "soap scam," now much more commonly known as the "online store scam." Many years ago a company made products and recruited people to sell them. Today there are hundreds of companies online who will set you up in storefronts to purchase goods. In both cases, for everything you sell, you make a little bit of money. But that's not how you make the big bucks. You do that, in both cases, by recruiting other people to sell. Everything they sell, they make a profit on, and you also make a small profit on. Then those people are encouraged to recruit other people. Those other people make a profit when they sell, and so does the person who recruited them and so does the original person. You can see how the pyramid works: The person at the top earns profits from what he or she sells and also from what every single person down the line sells, even those he or she didn't directly recruit, but were recruited through people they recruited. Who gets rich? The original person, who eventually stops selling directly and just rakes in the profits from those under him or her.
There are innumerable types of frauds: stocks, new business ventures, commodities or land fraud, bogus franchises, inventing marketing, talent promotion, dead-end work-at-home schemes, religious/medical/charity frauds and many more. If someone approaches you with a deal that sounds too good to be true, as we have stated before, then it probably is. Check, re-check, double check and then start asking questions. Don't fall for these things, no matter how good they sound.
Another thing to watch is your portfolio. Oh, I don't mean for those wealthy folks…I'm talking about normal working folks like you and me who might have a small IRA or a 401K or a pension annuity or something like that. If you are financially savvy and want to open, for instance, a Roth IRA, you can do so with the company of your choice and the fund of your choice. Several very good such companies include Vanguard, Fidelity and Janus, among others. Their representatives will talk with you directly and steer you into the right fund for your needs (mutual funds), such as the Vanguard 500 Index Fund. But if you work through a "financial advisor," be VERY WARY! If you have several different funds in your retirement account, for instance, and your financial advisor tells you to switch from X to Y, find out Y (pun intended). Study the new fund, find out why it was recommended. Find out its long-term prospects, and be sure you trust your financial advisor. I know several people whose financial advisor moved funds for them into a promising new high-tech fund. Within six months, the fund was worth 30% of its buy-in value, and investors lost thousands of dollars that couldn't be recovered. Always question. Always check. Your money is too important to be lost by following bad advice.
White-collar crime has been all over the news lately. You've read about the collapse of several companies and the resulting losses of money to people. You've read about corrupt politicians spending city money on personal goods. These are killing us because they affect everyone. Another example is the "rent strike" scam. Years ago in New York City, and accountant persuaded tenants to go on a rent strike. He was supposed to open an escrow account with $1.7 million of unpaid rent. He never did.
