When a Ponzi Scheme Hits Home

ponzi scheme

Shortly after returning from my missionary service in 2001, I was approached by a man who said he was experiencing some car troubles and needed a ride. I truly learned to love people on my mission, so I happily offered to help.

While I was driving, the man revealed his true “story.” What he really wanted was money. He needed a certain part to fix his car and he knew how much it was, he just didn’t have the money to get it done. I was reluctant but he was insistent, showing me his ID and giving me his address; begging and pleading. So I stopped at an ATM, took out some cash, and gave it to him along with my number to call once he could pay me back. I think it was around $180. No small sum for a broke, college-bound twenty-something.

Still feeling uneasy about the whole exchange, I returned home and told my mom. She basically said, in the most kind and compassionate way only a mother could, “Oh, I’m so sorry. Your money is gone. You’ll never get it back.” Refusing to believe it, I anxiously waited several days for that call to come. It never did. I had been duped.

Petty scammers and thieves are everywhere, and most people could probably relate their own embarrassing, infuriating story. But true white collar criminals, like the Bernie Madoff types, are in a league of their own. I had another, unfortunate opportunity to indirectly experience another scam--a ponzi scheme--but this time, it made a much more severe impact on the finances of many individuals, families and organizations.

In this post, I’d like to share a bit of my experience and some lessons for how to avoid losing everything to a ponzi scheme or other investment scheme.

I didn’t know much of the history or background of Rust Rare Coin, but they were making some claims that didn’t pass the “smell test” for me. I was acquainted with an organization and some people in my community that invested with Rust Rare Coin, a firm out of Salt Lake City that allowed investors (or so they were told) to buy into a service that was basically day trading silver (as in the actual metal) and claiming remarkable returns.

Remarkable may be an understatement. The returns almost seemed too good to be true, and even investors wondered how it could continue to perform so well. But perform well it did, and investor cash poured in. Rust Rare Coin had over 500 investors and managed $200 million of assets when all was said and done.

However, last year the garbage hit the fan. Federal and state regulators discovered that Rust Rare Coin was actually a ponzi scheme, a financial scam where returns are falsified and current investors dollars are used to pay the “returns” of other investors.

The devastating impact of this sort of activity cannot be overstated. I’ve personally heard of families that had invested their entire life savings with Rust Rare Coin. Some of them are in and around my own community.

How could this have been avoided? With the national media attention received by the Bernie Madoff fallout, why do we have 500 more investors and 200 million more dollars gone, with only a fraction likely to ever be reclaimed? How can you keep from being duped by an investment scheme?

Here are a few questions to consider before making any major investment decision.

Is there FDIC or SIPC insurance?

FDIC insurance protects against losses incurred by bank deposit products, like checking and savings accounts or CDs. Customers typically have $250,000 of protection per individual, per institution. Investment products like bonds, stocks, or mutual funds, never carry FDIC insurance.

SIPC insurance is protection for investments, but it doesn’t protect against loss of investment value. It rather protects against the loss of your investments held at a troubled SIPC-insured investment firm. If your investments go missing through illicit activity, your SIPC insurance can provide protection, up to $500,000.

Would SIPC insurance have protected Rust Rare Coin investors? Not likely. But SIPC insurance is typically reserved for more traditional investments like stocks, bonds, CDs, and mutual funds; which is a good thing since these are more commonly used investment products anyway.

Can you understand the investment?

Investments should be easy to understand. When you buy a company’s stock, you literally own a portion of that company and rights to its future gains (and losses) and/or dividends. When you buy a company’s bond, you are literally buying an IOU--the company takes your money with the promise to pay it back to you plus interest.

One of the big problems with Rust Rare Coin was that no one I ever talked to could explain what was going on under the hood. Everyone knew they were trading silver, but no one really knew what that meant or how it worked. They just saw their falsified account statements reporting hefty returns.

Sadly, there are a lot of complex investment products out there, some of which I’ve written about. If it takes a 50-page policy to explain an investment, or better yet if there’s no documentation at all, approach it with extreme caution.

What do the professionals say?

If there’s ever any doubt about an investment you’re planning to make, get a second opinion. Start with your state regulator or the federal regulatory agency called FINRA. The Protect Your Money section of their website is full of helpful resources. You can also ask a fiduciary--like a CPA, attorney, or registered investment advisor--who are required to act in the best interest of their clients. The last thing to do is simply take the investment product’s salesman’s word for it.

I hope this article has been helpful! Ponzi schemes and other investment scams ruin financial fortunes great and small. They ruin lives. Be suspicious of investments you make, especially when they’re sold to you with promises of huge upside and no downside. No such investment exists.