by Petro Maritz

Created on: January 28, 2009   Last Updated: February 04, 2009

Bernard Madoff was arrested on December 11, 2008 for securities fraud worth $50 billion. Charles Ponzi conned investors out of more than $7 million in 1920. Nicolas Cosmo was arrested on January 26, 2009 for fraud charges of an estimated $ 400 million. Arthur Nadel was arrested on January 27, 2009 on similar charges.

Ponzi schemes are generally defined as fraudulent investment operations that pay returns to investors from money paid by subsequent investors, rather than profit. As soon as more investors request to withdraw investments than new investments are made, the scheme falls apart.

But how is it possible that con artists to generate these amounts of cash without investors realizing what's going on? The truth is that it isn't easy to tell the difference between a fraudulent scheme and a good investment. Schemes like these work because they are well planned and excellently executed. Some plots run for years without raising any questions. A good example is that of Bernard Madoff. According to Federal complaints his Ponzi scheme had been underway since at least 2005.

There are however a few things that every investors can do to protect themselves from fraudulent schemes.

The first thing that a potential investor should keep in mind when choosing an investment is the transparency that a company displays. Companies that do not display a very clear statement of what exactly they are doing and how they are doing it usually should raise caution. Bernard Madoff told investors that his method was "too complicated for outsiders to understand". He answered all questions very cryptically and never revealed his strategies.

When prospecting investors assured themselves that business sound legit and strategies seemed realistic they should continue their investigation to a fund's numbers. A lot can be said about a company from its financial statements alone. Do the numbers add up? Statements should be evaluated for more reasons than to prove the company's financial soundness. Ignore the figures and see if the numbers make sense.

Charles Ponzi had people invest in postal reply coupons. During the early months of 1920 the United States Post Office stated that there were only 27,000 mail reply coupons in circulation yet Ponzi's corporation claim to have invested in more than 160 000 000 mail reply coupons.

Madoff's funds had a very stable return of 10.5% per annum for 17 years. One of his hedge funds even reported being up 5.6% during the total market collapse of November 2008. If that doesn't raise red flags, nothing will.

Investors should make a good study of funds before they invest in them. Anything that seems out of the ordinary should raise caution. Be careful before taking the risk of investing in schemes that seem to offer substantially better returns or benefits than other funds. There are many other options available. Rather take the safer option.

Charles Ponzi, Bernard Madoff, Nicolas Cosmo and others put together brilliant fraudulent investments that cost people millions. Be cautious about your investments and stay realistic. Rather take longer to achieve your investment goals than loose all your money at once by investing with a con artist.

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