Too Good To Be True

Just as financial products and systems are becoming more complex, so are the scams
that are being inflicted on the investing public. The financial scams being promoted
these days – especially over the internet – have become as sophisticated as the
clients they are attempting to target.

The word “Ponzi” was splashed across newspaper headlines in recent
years, but what does that term really mean?

What is a Ponzi scheme?

Named after Charles Ponzi, a well-known fraudster who used this technique to
fleece his victims in the United States early last century, Ponzi schemes are
scams in which the capital invested by new investors goes to pay income to earlier
investors, so new investors are always needed to keep the scheme going. A very
dangerous strategy and one that is doomed to eventually fail taking “investors”
with it.

An Australian example

In Australia, a sophisticated scam was perpetuated in the early 2000s against
wealthy investors by a New Zealand-born conman named Derek Turner through the
company he controlled, Turning Enterprises International. Based in the tax-haven
of the Bahamas, he promised investors monthly returns of 37% as a result of
his ‘sophisticated proprietary investment techniques’.

Turner’s clients included successful businessmen, professional share traders
and celebrities. After a lengthy investigation by the US Federal Bureau of Investigation
(FBI), he was convicted in 2006 of fraud and is currently serving a 20-year
sentence in a US Federal Prison.

How to spot a Ponzi scheme

Identifying a Ponzi scheme versus a legitimately sound investment opportunity
isn’t always easy but the common theme is that the opportunity just seems too
good to be true. Here are some points to note:

* It’s a secret: A genuine investment promoter will be licensed with the Australian
Securities and Investments Commission (ASIC) and will be happy to provide you
with fund data that can be verified. Be suspicious if promoters are overly secretive
in their dealings with you or use diversionary tactics to avoid providing information
such as audited financial statements.

* Lack of transparency about how returns are generated: Make sure you really
understand the investment and how it grows. Ask as many questions as you need
to. Don’t be tempted to invest in anything you don’t fully understand.

* Emotive language: This is often used to trick investors into parting with
their cash. Be careful of advertising that promises a “high-yield investment
opportunity” or states that the investment uses “top-secret”
investment techniques allegedly unknown to the wider financial community.

* Check fund data thoroughly: To maintain the appearance of authenticity a
fraudster will need to provide fund statements to investors. Checking the reliability
of any returns data can go a long way to uncovering a possible scam.

Just be careful!

Talk to us before making any investment, especially if it seems too good to
be true. Useful information about scams can also be obtained from the ASIC consumer
website at www.moneysmart.gov.au.