In recent times, we have seen a surge in individuals reaching out to us, seeking assistance after falling victim to Ponzi schemes or various types of fraud. This alarming trend aligns with the findings reported by CNBC this week, revealing that Ponzi schemes have reached the highest levels in a decade. As law enforcement agencies explore the reasons behind this increase, it is evident that investors at every level are vulnerable, from those losing a few hundred dollars to those facing multimillion-dollar losses.

The Rise of Ponzi Schemes

The current financial climate, coupled with a quest for high returns, has created an environment where Ponzi schemes thrive. Investors are enticed by promises of substantial gains, only to discover later that their hard-earned money has vanished into thin air. In response to this concerning trend, we present two simple steps that any investor, regardless of their experience or investment amount, can take to prevent falling victim to a Ponzi scheme.

Step One: Identify the Underlying Value

Regardless of the amount involved, the first crucial step is to determine the underlying value of the investment. Whether it’s a real estate deal, a business venture, a security, or an international investment, understanding what the money is going towards is fundamental. The investment process involves money going in and, ideally, more money coming out. The key question to ask is, “What is driving the increase in value?” Is it a growing real estate portfolio, advertising for a business, or the purchase of inventory for a promising venture? The details provided by the salesperson or company should be documented and thoroughly understood.

Step Two: Verify the Existence of the Asset

The second step is equally crucial – verifying that the asset or investment exists. This involves ensuring that the money invested is genuinely contributing to the stated asset. An example from our early investigative days involved a company claiming to buy distressed real estate parcels, fix them up, and flip them. By simply asking for a list of the properties owned by the company and cross-referencing it with actual titles and deeds, we exposed the scam. Only two properties were owned, both with mortgages and low values, far from the hundreds of millions claimed by the investment company.

The Power of Verification

Verification is the linchpin in preventing Ponzi schemes. It involves matching the money going in with the actual existence of the asset. Whether it’s real estate, commodities, vehicles, or any other investment, relying on third-party verification rather than statements provided by the sales company is crucial. Bernie Madoff’s infamous Ponzi scheme, which operated for two decades, could have been exposed much earlier if investors had verified the ownership of the securities supposedly bought and sold.

Preventing Losses, Safeguarding Investments

In the world of investing, preventing losses is the golden rule. Even seemingly small losses can wipe out years of hard-earned gains. By adhering to these two simple steps – identifying the underlying value and verifying the existence of the asset – investors can protect themselves from falling prey to Ponzi schemes. While other due diligence measures such as background checks, licenses, and references may be important, the core principle remains: Does the money match the asset? By taking these steps, investors can make informed decisions, avoid potential scams, and safeguard their financial well-being. Remember, the first rule in making money as an investor is to prevent losses.