Why Should You Avoid Investment Clubs?

The Ponzi fraud was named after Charles Ponzi who made millions early in the twentieth century by attracting investors in the USA to part with their money on the promise of high returns. he kept the victims coming by paying returns out of new investors’ funds. The biggest Ponzi fraud was committed by New York financier Bernie Madhoff who conned his victims out of �40 billion. He was jailed for 150 years in 2009 but this does not help the thousands of investors who lost their money.

Ponzi frauds are often dressed up as investment clubs, offering higher than expected rates of return to a select few who are invited to join. It is astonishing that these schemes continue with all the publicity surrounding the frauds that eventually come to light. These are classic frauds of course, relying on the persuasive abilities of the fraudster who comes across as a competent and respectable businessman. A Ponzi fraudster will build trust with his victims. He will select a sector of the community where he can easily establish a rapport. The word will get around that there is a genuine scheme that is paying high dividends and many will flock to invest. The fraudster simply pays out interest to the investors out of the fresh funds that keep on coming in, thus gradually eroding the capital funds that are not really invested at all.

Eventually such a scheme will collapse – it is inevitable. At some point one or more investors will decide to withdraw their funds, perhaps becoming suspicious. The pot of available funds for paying interest will no longer be available to give the impression of healthy investment returns. At this stage the fraudster will no doubt attempt to flee to some offshore location where he has salted away a large proportion of his takings.

The trouble is that the whole idea of the Ponzi fraud is based on a myth arising after the Second World War. Then a small band of altruistic investors banded together to help rebuild Europe after the devastation. Hugh sums of money were invested and the returns turned out to be enormous. The funding opportunity was restricted to a select few and the idea of being invited to an alternative investment market was born. The idea still persists and is exploited by the unscrupulous criminals. However, who knows, there may still be some truth in an investment club for the mega rich?

Mark Jenner is a forensic accountant specialising in fraud problems. He assists companies and other organisations to prevent and detect fraud and to recover stolen assets. He is a Fellow of the Institute of Chartered Accountants, a Certified Fraud Examiner and holds a Masters Degree in Fraud Management.