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Home > Uncategorized > Protecting Yourself from Pyramid or “Ponzi” Schemes

Protecting Yourself from Pyramid or “Ponzi” Schemes

February 21st, 2009

Businesswoman with handful of cashAs history’s finest investor, Mr Warren Buffet, once said, “You never know who’s swimming naked until the tide rolls out”. Well the tide has rolled out and investors are panicking withdrawing and liquidating their portfolios in a frantic rush against time to raise funds. It is in such dire times of massive redemption requests when Ponzi schemes (http://en NULL.wikipedia NULL.org/wiki/Ponzi_scheme) are unravelled in all crudity and it becomes all too apparent who was in fact swimming naked. Within the last months we’ve witnessed Madoff’s and this very week Stanford’s Ponzi schemes imploding, sucking in their wake thousands of millions of euros. Are we immune in Spain to such financial ploys? Not so.  

What is a Ponzi Scheme?

This scam involves promising high yields (above the market average) to dazzle gullible investors. These yields are actually paid to existing investors from the funds of newcomers. So a Ponzi scheme needs to continuously lure in a base of new investors to self-perpetuate itself. They normally spread themselves like viruses by word-of-mouth but do not frown advertising themselves in local newspapers. The first recorded case was in the USA in the last quarter of the XIX century although its name is taken from an Italian-American immigrant, Charles Ponzi, who fleeced thousands of investors in Boston in the 1920’s out of 10 million dollars. 

How Long do they Last

Not long, normally only months or a couple of years at most, a noticeable exception would be Madoff’s which lasted remarkably over three decades escaping all detection. As these pyramids need to continuously find a new influx of investors to meet the promised repayments of existing ones they eventually self-implode collapsing like a house of cards as they are unable to keep the rapidly growing pace. Noticeable cases in Spain (aimed exclusively at Spaniards) have been Forum Filatélico and AFINSA both dealing with postage stamps.

I’m too Smart to be Caught in One

No-one is too smart. Judging by Madoff’s and now Stanford’s cases in which the World’s supposedly finest and most sophisticated affluent investors have been caught-up one should not underestimate one’s own greed. These scammers are top salesman and bank on people’s greed to make a living. In fact these Ponzi schemes are not that rare at all in Spain.

If you pick up any weekly English newspaper sold in Spain you will read advertisements that promise you suspiciously two digit yields from exotic and often obscure foreign opportunities. Naturally, these financial advisors are unregulated by Spain’s CNMV (the equivalent of the UK’s FSA) and prey exclusively on foreigners, preferably on their own countrymen to create rapport. The reason that Spaniards are not targeted is that they would quickly raise the alarm of the local authorities so they are careful to only target foreigners, the elder the better, so as to go undetected for as long as possible. Then regularly wind up these boiler rooms and move on to their next scam. As it’s often said, if it sounds too good to be true it often is.

What do I do if I Suspect of One?

You can contact Spain’s CNMV (http://www NULL.cnmv NULL.es/index NULL.htm) to check the financial advisors that have contacted you are indeed regulated to offer you financial products such as company shares. The CNMV regularly updates in its website such fraudulent companies. If you suspect the yield is too high you may want to take a second professional opinion from an unbiased source such as a chartered financial advisor or a qualified lawyer.

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