No matter how many times innocent people become victims to Ponzi schemes, it continues to happen both with alarming regularity and extraordinary costs.

What are Ponzi Schemes?

Ponzi schemes first evolved when Charles Ponzi began enticing innocent people to invest in something with the promises of an abnormally high return. Ponzi would explain the rationale for the high performance as being attributed to special knowledge or insider advantages that the individual would obtain once becoming involved. The catch, however, was that the investment had been completely fabricated.

The process starts out with the scammer taking investments from the second round of investors and paying the promised dividends/returns to those in the first round. The intention being to have increasing numbers in subsequent rounds such that early investors can be paid what was promised, and the scammer can steal the rest. Sometimes there is a “paper” return, such as Bernie Madoff’s scheme where returns were supposedly “reinvested” and clients issued false statements that showed profits. To sway people to commit, the scammer chooses an affinity group so credibility is never challenged. The people who get in early refer others in their affinity group to the perpetrator, in turn lowering skepticism from new investors because they had been recommended by someone they trust. For example, Charles Ponzi targeted immigrants in New England, and Madoff targeted the Jewish community.

Example of Ponzi Scheme: The Case of the Golden Egg

Just recently in Canada, a few scam artists began taking money from investors under the pretense of investing in gold mining in Honduras, Venezuela, Ecuador, Peru, Canada, and the United States. They targeted individuals close to retirement and promised them that over the course of eight years, a contribution of CA$99,000 would grow to more than CA$1 million, with an annual return of about 34%. However, these scammers were actually using the proceeds to form shell companies. The con artists promised their unsuspecting investors that it was a completely low-risk venture. In the end, they had taken between $200 and $400 million from nearly 600 unsuspecting investors.

The stolen funds were in turn spent on expensive parties, estate property, a gold mine (NOT part of the investment company), and even jewelry stores.

The scam began to unravel when the son of an elderly investor couple, an accountant, detected the fraud through extensive research and launched a campaign to expose the con men. Victims were left homeless and often suffered rejection by those around them.

Gary Sorenson and Milowe Brost were convicted and sentenced to 12 years in prison. According to the judge presiding over their case, neither expressed any remorse for their actions.

Shockingly, the Sorenson and Brost scam was preceded by another famous Canadian gold mining scandal, Bre-X Minerals. Not only had that scam come under the close eye of public media, but it also related to gold mining. This sequence of events only demonstrates how cautious the public must be when seeking out new investment opportunities.

Three things to remember:

  • Commit substantial time and effort into researching and vetting potential investment opportunities.
  • Be careful with recommendations from your affinity groups. Just because you may know an individual well, does not mean their source is credible.
  • If it sounds too good to be true, it most likely is. Be wary of your investments.

If you’re considering new investment options or are worried you have been approached to invest in something that may be a potential scam, contact CRI to help ensure that your finances are in good hands.