Talk about money: Tips to avoid being swindled
by Mark Rosenberg
Jun 07, 2012 | 1789 views | 1 1 comments | 6 6 recommendations | email to a friend | print

In a Ponzi scheme, someone who claims to be a financial adviser creates the illusion he’s getting high returns for clients. Really, he’s just paying off early investors with money from new ones. He can keep the deception going for years before it collapses, leaving investors burned.

The scam is named for Charles Ponzi, who ran a $10 million swindle in the early 20th century. More recently, Bernie Madoff stole billions in one of these schemes and is serving a 150-year prison term.

Now, the U.S. Securities and Exchange Commission says a $60 million Ponzi-like scheme has been perpetrated right here, by an investment fund in Scotts Valley.

It’s a sad story, and it raises the question of what investors can do to avoid being victims.

There are many warning signs, and I’ve provided links to the SEC and FINRA websites below. But here are some red flags I think investors should watch out for:


Baffling brilliance

Some so-called advisers will use complex terms, jargon and acronyms that they know few people understand. An investor may think, “Wow! This guy is so smart that I can’t expect him to put his ideas into simple terms that I can understand.”

You shouldn’t think that. If you don’t understand the adviser’s proposal, tell him so, and ask him to explain it again. That’s his job. If he can’t do it, he’s not qualified to do his job, and you should look for another adviser.

If an adviser is a con artist, he won’t want you to understand how your money is invested. If an adviser is legitimate and ethical, he will want you to understand.


Fictional statements

In the Madoff case, clients were sent statements that Madoff wrote himself and were false; clients didn’t really own the securities they thought they owned. The same thing happened in Scotts Valley.

You should only invest where you will receive a valuation from an independent third party at least quarterly. In my case, I help clients invest their money, but I do not possess the funds. My clients receive statements from National Financial Services, a subsidiary of Fidelity Investments, or from a mutual fund or insurance company.

When you interview a financial adviser, ask: “Will I get a monthly statement? Where will it come from?” If the only statement you will receive comes from the adviser, that’s a warning sign.


Too good to be true

Today, the least risky investments, such as insured savings accounts and U.S. Treasury bills, pay an interest rate that is slightly above zero. If an adviser claims that he can get you 17 percent or 25 percent returns with no risk, or low risk, you should be suspicious.

Most investors want to get the highest return they can. But there is always a risk-reward tradeoff. Anything that has the potential to go up by 25 percent or more also has the potential to go down by 25 percent or more.

Learn about the adviser: If you’re thinking about opening an account with an adviser, check his or her background at

FINRA, the Financial Industry Regulatory Authority, and the SEC both have advice about avoiding fraud on their websites at or

Comments-icon Post a Comment
Larry Bensteen
June 12, 2012
The Ponzi Scheme in Scotts Valley is not the only scheme that has happened in our area--a resident and his wife of FERN ROCK WAY in Boulder Creek CA is another who has stolen MILLIONS from hard-working and the elderly of San Lorenzo Valley...

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