January 28, 1999
(Government Services and Lands)

INVESTOR ALERT
"Ponzi" Investment Schemes

The Securities Division of the Department of Government Services and Lands has become aware of a possible Ponzi investment scheme operating in Newfoundland and Labrador.

The Ponzi investment scheme is very similar to a Pyramid scheme. Generally, the Ponzi works by paying off early investors with the money coming in from later investors who are drawn into the Ponzi by the tremendously high rates of interest being paid and the guaranteed return on their investment. Ponzis can operate for a long time - until the promoter either disappears with all the "investments" or reveals that the investment "has gone sour." A major factor in the collapse of these schemes, in reality, is that there is no significant source of income other than that derived from the money of new investors. As the number of initial investors grows and the supply of potential new investors dwindles, the Ponzi collapses. While some of the initial investors may have made some money, the later investors end up losing most, if not all, of their "investment."

Here are some basic rules to follow in steering clear of Ponzi schemes:

1. Beware of promises of high, guaranteed profits. Legitimate investments involve some degree of risk. Do not be deluded by promises of high returns.

2. Avoid promoters who fail to provide clear and detailed explanations of their investment vehicles. Don't be fooled by promoters telling you that the investment is impossible to explain in layperson's terms. Ponzi promoters may also avoid mentioning names on the grounds that the people behind the plan wish to remain anonymous.

3. Check out the promoter's background. Contact the Securities Division to determine if the promoter is a licensed salesperson of securities.

4. Ask for detailed information in writing. You should insist on seeing detailed information from a promoter seeking large sums of money. Ask for information on the company, its officers, and its financial track record. Reluctance to provide detailed information should be regarded as a red flag.

5. Verify the promoter's claims. Don't accept at face value that the investment has the stamp of approval of a government agency, bank, or trust company. Contact the Securities Division to determine if the investment is registered under provincial securities legislation.

6. Remember that seeing is believing. Be sceptical about details that can't be checked out in person. Be leery of claims that all banking transactions and bookkeeping are handled in remote cities or other countries. Beware of cash-only transactions.

7. Resist pressure to reinvest without seeing your "profits." Ponzi schemes are often kept going by promoters who convince even the initial investors to roll over their "profits" by even greater returns. While it frequently makes sense to stay with a legitimate investment over time, be suspicious of promoters who are extemely reluctant to let you cash in on your gains.

8. Look for unbusiness-like conduct or disruption of services. Few Ponzi promoters enlist much, if any, office help and may even go to the extreme of answering the phone and handling all the mail themselves. This hastens the collapse of the Ponzi, since it makes it more difficult for one person to keep up with the required interest payments and investor contacts. Also be aware that when the Ponzi is about to collapse, promoters typically become more difficult to reach.

The Securities Division, Department of Government Services and Lands, is responsible for the protection of investors and ensuring that complete information is available for many types of investments. If investors have questions about a possible Ponzi or Pyramid scheme, they should contact the Director of Securities, Anthony Patey, at (709) 729-4189.

Media contact: Rick Callahan, (709) 729-4860.

1999 01 28 11:35 a.m.