NEW YORK (7/6/09)--Don't let your guard down. Even though Bernard Madoff received a 150-year sentence for a massive Ponzi scheme that bilked investors out of billions of dollars, other investment fraudsters are on the prowl. Look for warning signs to avoid being caught in a similar scheme (CNNMoney June 29).
In a Ponzi scheme, the operator, acting as a financial planner, promises investors steep returns--generally higher than those available through other investments. Instead of investing the funds, the operator uses money from those entering the scheme later to pay purported dividends to the earlier investors. Once the operator can no longer pay out to all investors, the scheme falls apart and victims are left stripped of their investments (FBI.gov).
In legitimate transactions, financial planners generally do not have access to their client's money directly. Instead, they buy, trade and sell investments on behalf of their client, but the planner never touches the actual funds--those are held in an outside custodial account, such as Charles Schwab, Fidelity Investments or T. Rowe Price. In the Madoff case, however, victims missed this safeguard and dealt directly with Madoff. Victims were unable to detect that he simply was paying them with investments stripped from other victims.
Use caution to avoid falling prey to a Ponzi scheme:
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