Ponzi-Mania: How To Spot The Lying Scum
Ponzi-Mania: How To Spot The Lying Scum
Thomas C. Scott, 03.06.09, 12:00 PM EST
Losing money with a conman is both infuriating and totally avoidable.

In my 25 years as a financial adviser I've seen my share of Ponzi schemes and similar frauds and met more than my share of victims. For those scratching their heads over how supposedly smart people can get sucked into them, here are a few insights into how to spot them and why they work.

A few years ago, I had lunch with a woman who was considering entrusting me with a portion of her wealth. I asked her what she had been doing with her money and she said that she had a large sum invested with an outfit in New York that was earning her a steady monthly return of 1% to 1.5%.

I asked her how the money was invested.

"I'm not really sure, but I get statements that show trades in different stocks." That was the first red flag. It just isn't possible to earn a steady 12% to 18% annual return in a stock account month in and month out. Then she told me that the fund was open only to "friends and family" of the guy who ran it. That was red flag number two. I didn't need a third.

After three minutes of listening to her wax rhapsodically about this exclusive investment, I told her, "It sounds odd. If you could show me some of the statements, I'd like to see how your money is invested. Who's the portfolio manager?" What I was thinking was: Lady, it's got to be a Ponzi scheme.

She flashed me a dismissive grimace. She clearly thought I was too dumb to grasp such sophisticated money management. "He has a sterling reputation. His clients include some of the smartest people on Wall Street and the biggest names in business."

She wasn't interested in anything else I had to say, and I never heard from her again. I later learned that her genius was none other than Bernie Madoff, and I have no doubt she stuck with him to the bitter end.
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