Ponzi Scheme

  A recent article* in the Province caught my eye. A Korean “financial planner” was arrested in Korea for allegedly running a Ponzi scheme, in British Columbia, that conned his clients out of at least 30 million dollars. These scams make me sad as they are easily preventable. Since people are still being conned by Ponzi schemes, I decided to write a blog on what is a Ponzi scheme.

   A Ponzi scheme is a form of investment fraud that promises the investor a quick return on their investment. Usually it promises a high return in a short period of time on the original investment. The way the con artist achieves these returns is by continually recruiting new investors. He then takes these new investments and pays them to the original investors in the form of “investment returns” . The original investors then become excited at the gold mine they have discovered and either reinvest their money or encourage their friends to invest as well. Eventually this scam collapses under its own weight. The con artist is no longer able to recruit new investors quickly enough and either runs away with the remaining money or is unable to pay back the investors. The real victims of these schemes are the last people to sign up.

  This con was originally made by Ponzi in the early 1920s. He promised his clients a return of 50% within 45 days or 100% of their money within 90 days. He promised to accomplish this with a form of arbitrage. He allegedly bought postal reply coupons at a discount and redeemed them at face value in the United States.    

  Unfortunately, these schemes are still occurring. The most famous one to date was run by Bernie Madoff whose scam cost his clients billions of dollars.

 In my next posting I will explain how you can avoid being the next victim in one of these scams.

You can find a link to the article here:“http://www.theprovince.com/news/Vancouver+churchgoer+accused+Ponzi+scheme+Korean+jail/2135089/story.html

¹ Arbitrage is when a person buys and sells a commodity in different markets in order to take advantage of differing prices for the same asset

Why we started this blog

Both Lannie and I have personal experiences with fraud. Both were sad and frustrating. They were sad because they happened to family members who were close to us. They were frustrating because, with a little preventative maintenance, both could have been avoided. The victims of these crimes were my grandparents and Lannie's mother. 

  My grandparents had a very traditional relationship when it came to money. My grandfather managed their finances for their entire married life. Unfortunately, as they aged this situation became untenable. My grandfather began to have trouble focusing and simple tasks, such as paying their bills, became unmanageable. He began to lean more heavily on their live in caregiver to help him with these tasks. She started out simply helping him write cheques and balance his cheque book. Eventually, he gave her access to his credit cards. She used them to run simple errands. Unfortunately, she also used them to make her own purchases. Since she also paid the bills, her behavior went unnoticed. This continued until my grandfather passed away and my uncle became actively involved in managing my grandmother's finances. After reviewing her old bank statements he was suspicious about some of the bills he found. He confronted the caregiver and she confessed to the personal purchases she made. She was fired and because my grandmother was so upset no criminal charges were laid. This incident could have easily been avoided if my grandfather had allowed us to find a professional to help him manage his bills.

  Lannie’s mother was also the victim of fraud. One of her co-workers told her of a savings scheme that she had joined. In this scheme, each member put in a sum of money and each month one member of the group got to use the money. It was a means for each member to force themselves to save money. Unfortunately, this turned out to be a fraud. The woman who organized the scheme left town with all their money she had collected and my mother in law lost her investment. Fortunately this story has a small silver lining. She now contacts us if she receives any solicitations through the mail or telephone. She recently received one in the mail which had a cheque and claimed she had won a lottery.  Fortunately she called us and we were able to convince her that the cheque was fake. 

  These experiences left us with a desire to help others from being a victim of fraud. In future postings we will talk about the various types of fraud that occur and how to avoid them. We hope that our readers will find this information useful.