First, you must understand how a Ponzi scheme works before you can recognize one. The first known Ponzi scheme was started by Charles Ponzi in 1903. In short, he gathered thousands of dollars from people who wanted to invest in his “stamp” business. He used money from the first investors to pay the incoming investors. He was paying out more than was coming in from his investors and business. Eventually his scam collapsed. The same happened in the recent case of Bernard Madoff. Ponzi schemes are sometimes referred as pyramid schemes, but they are a little different. A pyramid scheme, has a slow and steady rise, and the people at the top can make excellent money. A Ponzi scheme brings in investors as fast as possible, and then it collapses.
Now that you understand a Ponzi scheme you need to know how to recognize one. If somebody approaches you about investing money or starting a home business, you need to check the background of the founder and company. The first thing you should do is contact the Better Business Bureau. If the founder and/or company has less than B average, stay away. Also, Google all the variations of the founders/company’s name. For example if the name is James Smith, Google Jim Smith, James Schmit, Jimmy Smith etc. If anything sounds remotely familiar to the business that you are investing in, cross check each name. Con artists like to change their names and business names often.
f you are investing in a home business or service, be aware of the buy in price. For example, if you are investing in a travel business that offers unlimited travel for life, and the buy in is $5,000, be leery. You should be able to buy a comparable package for 1/2 the cost. If you are investing your retirement with an independent contractor, be sure his/her interest rates are on target with large bank rates. An independent contractor offering 7-8% interest return is most likely running a Ponzi scheme.
In addition to doing your due dilligance, take all contracts to a lawyer. I had a gut feeling that the contract I signed was not legit, and unfortunately, I was correct. If there are spelling mistakes, or the contract is not water stamped, this is another sign of a Ponzi scheme. Have a lawyer look over all documents before you send any money.
Be sure that the company has a real company office and not a Post Office box. When you Google the address, be sure to Google it using Google Earth. That way you can see exactly where the company office is located. I was surprised to find out my scammer’s company office was a UPS drop off site! The scammer was operating in Florida and his business was in Georgia (UPS site). Ponzi scams are operated in this fashion to make prosecution more difficult.
Use your gut-instinct. If it seems too good to be true it most likely is. Invest money with trusted company or hide it under your mattress. At least it will not be in the hands of a scam artist!