Few negative connotations can match that of Charles Ponzi; the “Ponzi Scheme” is indelibly etched into our consciousness as a colossal swindle.
Ponzi in 1920 placed an advertisement in newspapers promising a 50% return on investments in 45 days and 100% return in 90. It is almost laughable, except for those poor souls who bit and lost it all. By today’s standards, the $10 million invested (and lost) with Ponzi seems modest; Bernie Madoff, the “king” of the Ponzi mountain received $65 billion, most of which is lost.
Locally, Tony Young, of Kennett Square, pleaded guilty to fraud charges in July 2010; he had corralled $95 million from investors and was using much of the funds to support artificial returns to early investors. Of course in his halcyon days, before the inevitable collapse of his investment firm, Mr. Young created a lavish lifestyle for himself, which is an inevitable attribute of the Ponzi schemers.
A recent article in “The Legal Intelligencer,” our daily legal journal, created ten guidelines investors who seek an investment advisor should adhere to in order to avoid being pulled into a Ponzi like scheme. If you are investing with an advisor to manage your estate:
- Your funds should never be invested in accounts in your advisor’s name. They should go into the account of a reputable custodian, and audits of your accounts should be performed on a regular basis.
- The custodian who maintains your account should be totally independent and not affiliated with your advisor. The advisor’s function should be limited to giving advice; he or she should not be doing the actual investing.
- Any investment account which is showing an excellent return on your investment through good and bad economic times should alert you to possible fraud. If it looks too good to be true, it probably is. Investigate any dramatically high returns very carefully.
- Another sign of danger is an account that shows about the same return, year in and year out. Even the very best and brightest have down years; investing is a volatile business.
- Insist that your monthly statements are to be sent to you by your independent custodian and not your advisor. Misinformation distributed to the investor about the condition of his or her account is virtually always an element of Ponzi schemes.
- Do not be drawn into an investment strategy which is too complex for you to understand. Your advisor should be able to explain the investment strategy being employed in clearly understandable terms.
- You should set short-term and long-term investment goals, and your advisor’s strategy must be consistent with your goals.
- Beware the advisor who would lead you to believe that investing with him or her makes you a member of an “exclusive club.” Bernie Madoff was highly selective in whom he would advise; as a result, people clamored to have him as their advisor.
- Beware the advisor who wants to be your “pal” and is completely compatible with all of your personal beliefs such as politics, religion, sports teams, etc. It can be another gimmick employed to gain your confidence falsely.
- Be skeptical of employing an advisor who has been recommended by a member of your church, country club, or other organization you belong to. This is serious business and before accepting any such recommendation, you should employ extensive due diligence, irrespective of the source of the initial contact with a proposed advisor.
Not included on the list, but also a clear warning, is the opulent life-style of the advisors; this very often includes extremely “generous” gifts to high-profile civic causes, such as art museums, orchestras, and universities.
You have worked hard to create an estate, and one of life’s great challenges is to preserve and obtain a fair return on it. No one can guarantee the success of your investments, but with care you should be able to avoid the dishonest investment advisors and the devastation experienced by people who entrusted their entire estates with the Ponzis, the Madoffs, and the Youngs and others of their ilk.
— Ken Butera