Have You Heard About the Ponzi Scheme?

Physician's Money Digest, February15 2003, Volume 10, Issue 3

Want to get rich quick? Better forgetit—there are no shortcuts towealth. Yes, some lucky few strike it richquickly, but the circumstances usuallyrepresent dumb luck, not smart investing.In truth, scam artists have a field dayripping off investors, in all walks of life,who are looking for shortcuts. The traditionalunsuspecting "little old ladies" areno longer the only targets of swindlers—doctors, lawyers, and business peoplenow fill the ranks.

THE PONZI METHOD

Investment scams take many forms,but most are a variation of the old-time"Ponzi scheme," named for CharlesPonzi, an Italian emigrant. In 1919, heclaimed to deal in international postalcoupons—then prepaid postage certificates—that could be enclosed with a lettergiving the recipient postage to sendthe giver return correspondence. Ponzisaw a way to appeal to people's greedand ignorance.

By explaining that he could buy postalcoupons in countries with weak currenciesand sell them for a profit in countrieswith strong currencies, Ponzi convincedpeople they could get a 40%return in 90 days. As preposterous as theconcept sounded, thousands of peopleinvested. With just $30 worth of legitimatelypurchased postal coupons, Ponziraked in $10 million of investor's money.

Under Ponzi's scheme, initial investorswere actually getting their promised40%, but he used new investor dollars topay off the existing investors, skimmingoff the top for himself.

TODAY'S STYLE

Modern-day Ponzi schemes work similarly—investors get authentic-lookingbut bogus account statements showingmoney in their investments that isn'treally there. Other variations haveequipment-leasing or real estate banditsselling or leasing the same property to 3or 4 different people.

Regardless of what's being bought orsold, the underlying concept alwaysseems to follow Ponzi in some form—new money is used to help the scammerkeep up appearances (and dampen suspicions)with existing investors.

That's exactly what scam artists wantto hear. Indeed, investors with a healthyfear of being cheated are viewed as toomuch work for scam artists. These doubtingThomases don't believe the higherthan usual returns and superlative descriptionsof touted investment. Cynicismand doubt keep them from fast, foolishinvestment decisions.

The majority of people, however,possess the other essential element ofan avid investor—greed. And greedneeds to be only a little more motivatingthan common sense for scammers tohave eager targets.

Note:

If you're a doctor who suspectsa financial fraud, contact the NationalFraud Information Center (800-876-7060;www.fraud.org), an independent consumerorganization.