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Advice | Friend or Fraud: Seven Ways to Spot a Ponzi Scheme and Other Scams


I interviewed my 20-year-old daughters as part of a project on financial milestones. When I asked what was the hardest thing about managing their money, I was struck by something my youngest said.

We talked about the stresses of growing up, like paying your own bills and navigating the many financial decisions you have to make. But then the conversation led to something I didn’t expect to worry me: watch out for fraudsters.

We assume that scams mainly affect older adults. But a look at consumer complaints in 2021 found that younger adults were 34 percent more likely than people age 60 and older to report losing money to fraud, according to data collected by the Federal Trade Commission. Younger adults were more than four times more likely than older adults to report investment scam losses, the agency reported.

“When you grow up, I feel like everything is just up in the wind,” says my 22-year-old, Jillian said. “And on top of that, there’s a lot of stress in terms of people constantly trying to scam you.”

She and her 27-year-old sister confided in me that growing up could mean losing the protection of your parents.

“I just feel like there’s a lot of things about being an adult where there’s no safety net,” Jillian said. “I don’t mind doing my own laundry and cooking my own food. I just don’t like not knowing…when I’m being scammed. Is this person going to get me dirty, and like, can I call mom and dad to fix it for me?

Adult life often comes with the realization that people will prey on your desire to grow your money. Are one of the reasons I’ve decided to dedicate my column to an occasional series on the basics of money called Financial Adulting 101.

I thought of the discussion with my daughters when I read about an alleged $500 million Ponzi scheme who, according to the Securities and Exchange Commission, were hunting Mormons.

The regulator alleges a Las Vegas lawyer tricked people by telling them their investments would be used to advance loans to people who had settled personal injury settlements with insurance companies but did not want to wait for their payments .

Some investors were promised a return of at least 12.5 percent every 90 days, or a 50 percent annual rate, according to the SEC filing. Investors had to monetize the premiums paid by the slip-and-fall clients to get their money faster.

But the SEC says no such settlements existed. Instead, existing investors were paid with money from new clients – a classic Ponzi scheme. The rest of the money raised went toward “funding lavish lifestyles, including buying luxury homes and properties, a private jet, ATVs, boats, and numerous luxury cars for themselves and their family members,” the SEC said in its complaint.

An alleged $500 million Ponzi scheme preyed on Mormons. It ended with FBI gunfire.

This case is an opportunity to repeat the signs of a scam. Here are seven common red flags:

1. The promised return is extraordinary

Just stop thinking. How can investment promoters guarantee high returns if regular financial companies do not?

Can some investments produce extraordinary returns? Sure, but not without risk and the possibility of losing all your money.

It is when you are promised a specific and consistent return that you should back out of the deal.

Yes, It’s a Scam: Simple Tips to Help You Detect Fraud Online

2. High return is presented as low risk

This is a dirty lie. All the time, every time.

Investors in the Las Vegas case were told their risk was close to zero, according to the SEC.

A high return always means that the investment is risky. Just remember: risk and reward are equal partners.

When the risk is low, the return is usually low. If the return is potentially high, the risk is high.

If someone promises a low-risk investment with a return well above the recent average return of more traditional investments, someone is trying to scam you.

3. The investment data is confidential

The deal is too secret to allow you to investigate.

In the case involving the Las Vegas attorney, investors were told that the law firm had relationships with personal injury attorneys whose clients settled with insurance companies. But the investment agreements prohibited signatories from contacting parties related to the settlement without written consent, the SEC complaint said. But even with that provision, investors should still have been able to check public records to confirm that the claims were legitimate.

Some investors contacted the attorneys named in their agreements only to discover the affairs were bogus, the SEC said.

If you are not allowed or discouraged from verifying the details of a deal, it is a scam.

Calling your state securities regulator will save you a lot of money and heartache. Find out if the person selling the security is licensed in your state. You can find your state regulator by visiting the North American Securities Administrators Association website (nasaa.org).

4. The investment is promoted by people you trust

Scammers are masterful at winning the trust of unsuspecting investors, sometimes even getting down on their knees and praying with their targets to win them over.

I reported on a Georgia man—a preacher, no less—who was convicted of stealing nearly $9 million from 1,600 small black churches and other nonprofits by promising them a big return on small investments.

Scammers have long misunderstood and taken advantage of inexperienced investors because they know that these are people who do not trust their own instincts or have great confidence in their investment knowledge. Thus, scammers recruit people who inspire confidence to promote their scheme.

This type of scam is called affinity fraud.

The word ‘con’ in con man means ‘trust’. Scammers gain people’s trust by joining or infiltrating religious organizations or circles of friends and relatives that you may not question.

The FBI says he was running a crypto Ponzi scheme. Investors refuse to believe it.

5. You will be offered a bonus for referring friends

If recruiting other investors is key, you may unwittingly be part of a scam. Who better to involve others in the fraud than a friendly face?

6. Big payout testimonials

Scammers love it when early investors brag about their returns. It adds legitimacy to the scam.

In the most successful scams, many participants get the promised payout.

But don’t let the stories of friends and family who have had big payouts be the only reason to invest.

A reality TV couple wanted to “bless” black people who are suffering financially. According to the FTC, it was a pyramid scheme.

7. The promoter gets angry with too many questions

I once went to an investment seminar that turned out to be shady. I kept bombarding the promoter with questions, and she got angry and asked, “Would your girlfriend suggest something crazy to you?”

“Yes, ma’am, she could,” I shot back.

If the person introducing you to the arrangement has not done their due diligence, you could both be misled.

The SEC said a promoter in its case reportedly “reacted angrily and dismissively when investors asked questions about the specifics of the alleged investments.”

Huge crimson red flag.

If you ever get the feeling that you are stupid or unable to ask questions about an investment opportunity, you are definitely about to be scammed.

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