Sunday, 1 May 2016

Ponzi 101

My brother and I got into a discussion this week....mostly related to finance and ponzi-related schemes.  My general observation is that the public....because of declining CD rates over the past three decades, poor finance understanding, and lousy SEC enforcement....allows these schemes to flow like a stream.  You can probably draw a 100 mile circle around your house and find at least two or three schemes actively working, until someone asks stupid questions or the SEC wakes up from their drug-induced daze to figure out the ponzi values on the operation.

So, my ten tips on seeing through the ponzi fog and knowing when to just walk away.

1.  When you sell securities, you have to be registered in your state.  So when "Joe Jones" is talking up this bond, or this new fund, or investment deal.....ask him....is he registered?  If he says yes....go Goggle up the state board on securities in your state, and call them up.  If we were talking about a $40 investment.....it'd be a waste of time, I admit.  But if you are writing out a check for $10,000....the guy accepting it ought to be registered.  If he's not, then just walk away.  If he says that he's a special type of securities seller and not required by state law to be registered.....he's lying, and you need to walk away.

2.  Who is the guy at the top?  Every funds guy has a name, and has a resume.  If he's some fifty-year old guy who has worked at Janus, Prudential, etc....he has a reputation.  If he's a guy who has a three-line resume or simply sold real estate for the past twenty years, or never been in actual big-time companies.....WALK away.  When the securities dealer just wants to talk over the fund, and NOT the guy who manages the fund, or even discuss the manager's past performance....WALK away.

3.  Guaranteed returns in excess of three or four percent.  Typically, with a decent high-value CD....in today's world....the max you will get is two-percent.  With some long-term bond, maybe four percent.  Beyond that, nothing is guaranteed.  It doesn't matter how many times they utter guaranteed or flash some slide on the wall with guaranteed 10-percent interest....WALK away.  Now, if they talk about stocks, dividends, and locking you into a present return (not guaranteed) of ten to twenty percent, that's a different story.  I can find fifty stocks presently on the NASDAQ which are seriously under-priced (particularly oil and natural gas)....these are all stocks which lost value, but return a quarterly dividend of five to twenty percent currently (yearly).  I should note though....these aren't guaranteed, and at any point, the present value might decrease another 10-to-40 percent.   In this case, the dividend might be attractive, but could you afford to lose 10-percent of your value with the risk attached?

4.  Secret or privileged investor knowledge.  When the securities guy says he has insider knowledge and by getting into this special group and putting your $100,000 down....you can be an "insider".  So, one of the general rules of a state securities guy....is that you aren't supposed to take insider information and benefit.  It's something that the SEC frowns upon.  It's a small sign that you've got a guy who bends the rules.

5.  Cash investment.  If your securities guy is talking about you investing and doing this by cash only....to avoid transfer fees or paperwork.....that's another sign to just walk away.

6.  Name the companies.  When the investor guru talks up the twenty-percent yearly return (guaranteed of course)....ask him to name the companies that he buys from.  A ponzi scheme guy will typically say it's not regular stock but related to the cruise-boat line, foreign capital situations, or resort opportunities.  They will avoid bringing up actual real stocks because you can Google up NASDAQ and view their yearly dividend payouts.  There are actual new resorts being bundled and built yearly, but none of these are guaranteed (note how that word keeps coming up).  If the guru says five or six stocks....what are they and what's the typical yearly dividend?  You can find that via a dozen ways.  Most stocks (probably ninety-percent) pay less than two-percent a year on dividend....so how that manipulates itself into 20-percent guaranteed ought to be another sign to just walk away.

7.  The frozen funds slant.  When the guru says that with your $100,000 check.....you are an insider now....he'll often hint that there's a period of frozen activity so he can safely and wisely invest and return dividends on your money.  This frozen period is a minimum of six months and usually up to two years.  He might actually generate some fine and fancy monthly reports which always make you happy about the frozen money and active dividend status of the money.  Maybe early on in the Ponzi scheme....if you asked for $5,000 back for some emergency, he might be agreeable.  Near the end, when he's going to run.....no reason will be acceptable to return even a nickle of your investment money.  This is different from a bank where you open a CD, and can close the CD tomorrow....losing the profits off the period that you promised to maintain the CD there.  In this case, the bank will return the money that day (in most cases).

8.  "Double your money back".  It's a wicked phrase, and the minute you hear it....WALK away.

9.  The claim of non-taxation.  Typically, a good Ponzi-scheme will note that a fair amount of it's gimmick is to go overseas, make profits without taxation in those countries, and then quietly return the money to you....."tax-free".  Very few countries operate without taxation....those that do....are places of risk.  I know.....tax-free always sounds good.  But other than a dozen-odd states which operate low pay-out bonds which are tax-free but rarely pay more than two-percent dividend a year....this is a bothersome topic and rarely fits into a high dividend gimmick of Ponzi schemes.

10.  Everything seems vague.  If you walked into a Ford dealership and he started talking about a new "Wonder-Czeyzch engine", "duplo-tires", "carto-duloony-traction".  You'd stop the Ford kid and ask what the heck these were, and you'd want to have a full explanation in simple terms....before you put down $20,000 for this new car.  When the securities guy or guru starts using new and unusual terms....always vague in detail....stop him and ask for full definitions.  If the definitions are simply vague definitions or full of more $90-words.....it's a sign to walk away.  Nothing is vague about a bank CD.  Nothing is vague about buying a plain Janus Twenty-Fund.  Nothing is vague about New York state tax-free bonds.

One final note....if any part of a guru's 'get-rich-quick' scheme is about gold speculation....why would you bother using him as a middle-man, when you can buy your own gold coins, bars, etc....by just avoiding this middle-to-the-middle man routine?  Gold is pure speculation though, and the prices change hour by hour.....which makes it's attachment to a guaranteed 20-percent dividend to be hilarious and comical.

It simply doesn't take a rocket scientist to recognize a Ponzi scheme.  It does take some brave nature....to just smile and walk away.

I could have made this a forty-page introduction, but these ten observations are usually enough for a high school educated guy to see through the Ponzi-fog and be smart enough to walk away.