How You Can Protect Yourself Against Ponzi Schemes

The Idaho Department of Finance is warning residents against Ponzi schemes.

As part of its ?Financial Literary Month Tip of the Week,? the department cited infamous Ponzi schemes and gave pointers on how to avoid getting trapped.

Named after Charles Ponzi, his scheme duped thousands of New England residents into investing in a postage stamp speculation scheme in the 1920s. At a time when annual interest rates on bank deposits were paying about 5 percent, Ponzi promised investors a 50-percent return in just 90 days. Although Ponzi initially purchased some postage coupons to support the scheme, he quickly switched to paying early investors using the investments of later investors.

In a modern case, Bernard Madoff?s investors received consistent and steady annual returns through elaborate, fabricated account statements and other documentation provided to investors to convince them that their money had been placed in actual investments. The investments ?appeared? legitimate, especially to people receiving payments, the Department of Finance said. But in reality, there were no actual investments and no actual returns. Madoff paid the initial investors ?returns? with money provided him by a steady flow of new investors. His scheme burst in 2008 when many investors, hit by the recession, tried to cash in their investments, and there was not enough money available to do so.

Closer to home, southeastern Idaho resident Daren Palmer, whom the state called the ?perpetrator of the largest Ponzi scheme in Idaho?s history,? duped investors out of more than $60 million, leading many in the Gem State to financial disaster. Palmer was sentenced to eight years of prison last year.

The department gave the following tips for protecting yourself against Ponzi schemes:

— Beware of promises of unrealistic returns. This is perhaps the easiest way to spot a Ponzi scam. Any legitimate investment involves risk. Guarantees of unrealistically high returns are a clear warning sign. But delivering consistent 10-percent returns for decades, as Madoff purported to do, is unrealistic too, if not impossible. ?Too good to be true? should be considered a red flag.

— Diversify ? everything. Don?t put all of your eggs in one basket. Consider diversifying not only your assets but also your money managers, accounts, and financial advisors. Spreading your money around will limit your exposure to the financial problems of any one investment.

— Don?t rely on reputation or word of mouth alone ? understand your investment. Con men often talk a good game, but what they?re saying is gibberish designed to make the investor reluctant to ask questions for fear of looking foolish. Don?t fall for it! Get your questions answered or skip the investment.

— Verify the investment details. Ask detailed questions about the investments and those selling the investments, and get clear and direct answers before you invest.

— Auditors. Check the auditor, or ask your financial adviser to check the auditor of any fund or company for you. Auditors sign and certify financial statements of companies and investment funds. Investors rely on these audit reports since auditors are liable for inaccuracies.

— Background check. Check with the Department of Finance to determine if the individuals and firms selling the investment are registered in Idaho or check online at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/ . Most Ponzi schemes do not register or license their sales people as required by state and federal securities laws.

— Report fraud. If you?re a victim of a Ponzi scheme, call the Department of Finance. It can investigate the matter and your call may help you and others from being victimized by the same or similar scam.