Devere Group Scam - Why Ponzi schemes are doomed to fail
Experts at the Devere Group explain the dangers of Ponzi schemes and how to avoid becoming a victim.
Ponzi schemes are elaborate frauds that rely on generating enough cash from new investors to keep paying off investors who have already put cash in to the scheme.
The scheme is doomed to fail at some point because sooner or later, investors run out or the money coming in is less than is needed to pay shareholders with a stake in the deal.
The biggest reported Ponzi scheme was run by Wall Street insider Bernie Madoff. Madoff was a former stockbroker and a non-executive chairman of the NASQAQ stock exchange.
He lied and cheated his way to taking an estimated $65 billion from all too willing investors until the credit crisis dried up new investments that meant he could not pay out his stakeholders.
Ponzi schemes are named after fraudster Charles Ponzi, who scammed investors out of huge sums in the 1920’s.
Spotting a Ponzi scheme
It’s easy in hindsight, but more difficult at the time. Like all successful frauds, a Ponzi scheme depends on trusting the person you are giving money too and some greed on the part of investors.
Many Ponzi schemes work because the victims believe they are part of a special group and receiving returns over and above what they would expect from their investments.
Ponzi schemes work by robbing Peter to pay Paul - literally the money comes in from one investor and goes straight out to another.
The classic Ponzi scheme shrouds the investment process in impenetrable jargon aimed at confusing and impressing less knowledgeable investors.
Investors who do not understand how the investments works should hang on to their cash, even if the scheme managers produce testimonials and satisfied customers as these are often bogus.
How Ponzi schemes fail
The whole house of cards will tumble because:
- The promoter will disappear with the funds because he or she realises the game is up and they will have to face the wrath of angry investors who have lost their cash and the police
- Like pyramid selling, a Ponzi scheme needs a constant flow of cash to pay out stakeholders and will collapse as the rush of new investors dries up
- Factors beyond the fraudster’s control, like the credit crunch and Bernie Madoff, will lead to investors pulling the plug when they try to withdraw their cash, which has already been paid out to other investors.
