February 18, 1999
(Government Services and Lands)

NOTE TO EDITORS:

Ponzi Investment Scheme

The Securities Division of the Department of Government Services and Lands issued an investor alert regarding a possible Ponzi scheme (see below) on January 28, 1999. To date, the division has received more than two dozen calls, a large percentage of which came from the New World Island area. Most of these callers didn't give their names and no one made an official complaint.

As a result of these calls the Securities Division plans to hold an Investor Education Seminar at the Summerford Community Centre at Summerford, New World Island on March 4, 1999 beginning at 7 p.m.

For further information about this seminar, please contact the Securities Division at (709) 729-4189.

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

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INVESTOR ALERT
"Ponzi" Investment Schemes
(Originally issued January 28, 1999)

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 extremely 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.

1999 02 18 3:15 p.m.