How not fall victim to the Ponzi scheme?
Yesterday I saw an article about Zach Avery, a young aspiring actor, who was arrested in April 2021 by the FBI and accused of scamming millions of dollars from investors and running a 650 mil.$ Ponzi scheme. He was promising his investors extremely high returns and used well-known companies’ names to make his promises seem legit. But he knew it was a lie and used the money to fund his lavish lifestyle. At some point, he was able to pay off some investors, using money from other investors to do it, but eventually, he started to fall behind on his payments, and investors started to raise voices. Yesterday, September 9th, 2021, Zach Avery pleaded guilty to operating 650 mil dollars Hollywood Ponzi scheme. While Zach Avery repaid lots of the money to lure more victims into investing more, he still failed to return 231 million dollars and is facing up to 20 years in prison.
So what is the Ponzi scheme, how can you detect it, and what can you do not fall victim?
Kingsley Kobayashi, CEO and Founder of Kobayashi Group Japan, financial guru and investment expert, always tells his clients, “If it sounds too good, if somebody promises you huge returns overnight, it’s most probably a scam.”
And he is right. I see it every day, people complaining they “invested” money with someone, promising them huge returns, but the money is not coming as promised, not coming at all, or they are told to bring in more people before they get paid… And that’s what the Ponzi scheme is all about.
A Ponzi scheme is an investment fraud that pays its existing investors with funds collected from new investors. You might also know it as a Pyramid scheme. You will be promised high returns with little risk, but in reality, you risk everything. Because the Ponzi scheme is an illegal business practice, and most probably, you will be asked to introduce people to this “business,” you will also be committing a crime, even though you might not be aware of it. In the scheme, as an investor, you give money to a so-called portfolio manager and are asked to recruit other investors, who then are asked to bring other investors. You will get paid from the funds collected by people who invested after you. That’s if you are even lucky to get paid at all.
How can you avoid a Ponzi scheme? I asked Kingsley Kobayashi what people should do when investing, and he shared his few golden rules.
- Follow your instincts
If it sounds too good, it’s most probably a scam. Follow your instinct. If somebody promises you to turn your $100 into $1000 without risk and quickly, you are taking a considerable risk of falling for a Ponzi scheme and losing your money and your reputation, in case you bring in more people into the “business.”
2. Invest with known institutions
Invest only with financial advisors, brokers, or managers who have proven track and records to show you their past success stories. Demand to see reports about the investment.
3. Do your Due Diligence
Do your research about the investment. What is the project about? What assets are backing it? If it’s just “Give me money, bring five people who also give me money, and I will triple your initial investment,” you know it’s a Ponzi scheme. Your investment should never be conditioned by introducing more people. If you do your research and cannot understand it, ask the project manager to explain it to you. If he cannot, you know it is not suitable for you. You must be able to understand what it is you are putting your money in.
4. Don’t invest money you will need back soon
Only invest money you do not need right away. Many investments are longer-term, so do not invest and ask for it within the next week or month. Understand the terms of the investment, duration, and exit strategy.
5. Understand the conditions
Understand the conditions of how you will get your money out. What is the minimum duration? Do you have to put in the notice and how many months, weeks before? Will the money be automatically transferred to your bank account? Check all the fine print of the contract.
6. No contract? No money!
If there is no contract, do not invest. You should never rely on the word of somebody, even if the person is your friend or a family member.
To sum it up. If the “business” is promising you abnormally high investment returns yet has no business model or a very vague one, be vary. If your profits are conditioned by bringing in more investors, and you are pressured to put your money in now, walk away. It might have worked for Peter but won’t work for Paul. You do not want to lose your credibility by bringing your friends and family members into the business to get your money out because then you are part of the problem and are committing a criminal offense.
It is always vital to know who you are dealing with and understand where you are putting your money. Be suspicious of unsolicited offers. If somebody contacts you to “invest” your money in his great business, and promises you high returns, stay away. Yes, the person might seem legit, but legit investments have enough investors; they don’t have to pressure friends into it.
Sure, you may miss out on one time opportunity but most probably not. Remember, “If it sounds too good to be true, it probably is!”
Blanka Kobayashi is an author of The Beginner’s Guide to Financial Freedom, a simple guide for those who would like to get a job, make more money with various side hustles, invest it and secure financial freedom for themselves and their families.
