by Barbara Mccutcheon

Created on: January 29, 2009   Last Updated: February 04, 2009

A pyramid scheme depends on participants' ability to recruit others. Unfortunately when people are unable to attract more participants the pyramid collapses and only the few at the very top will profit. A Ponzi scheme is a pyramid scheme where a manager takes care of attracting investors. Investors are promised high returns, but these returns are paid from later investors rather than actual investments. Most Ponzi schemes collapse fairly quickly, due to promises of high percentage returns. Bernard Madoff's scheme managed a longer than normal lifespan due to the fact that it offered a return that was only slightly above that of many investment funds.

The Stock Market provides businesses a way to expand the number of potential investors. This helps a person acquire the money needed to build or expand his business. If the business does well, the investor receives a share of the profits; if not, the investor may lose some or all of his investment. A legitimate investment firm will purchase stocks with an investor's money and the investor's return will be based on how the businesses actually perform. When an investor wants to withdraw money, the investment firm sells the appropriate amount of stock and sends it to the investor.

Bernard Madoff started out managing a legitimate investment firm, but when an investment strategy failed, he began misreporting investment returns and using new investors' money to fulfill earlier investors pay-out requests. At this point investment fraud became a full blown Ponzi scheme.

Like Mr. Madoff, there are many businessmen who offer opportunities that aren't quite what they seem, and sometimes it's difficult to tell them from legitimate investment firms. Fortunately there are a few guidelines that can help potential investors avoid becoming victims of Ponzi schemes and other investment frauds.

Any investment where profits depend on the number of people who invest after you should be suspect. Some schemes may try to hide their nature by appearing to be multi-level marketing by requiring participants to purchase products and/or marketing material.

The advertisements for some programs may contain supposed testimonials from people who received huge payouts in absurdly short time periods. These may be "shills" who are paid to lie about their earnings. Check out any plans and their managers through your State Attorney General's office, the Better Business Bureau, and other resources. Don't forget to look up the program, manager, and people who wrote testimonials through a search engine.

Make sure you understand how the program works, and get the information about it in writing. If an opportunity depends on a secret strategy or one you do not understand, and especially if the promoter claims it is too complicated to explain, choose something else. This also goes for any investment that does not provide a brochure with specific information about the program.

Most importantly, keep in mind that "There Ain't No Such Thing as a Free Lunch." An opportunity that sounds too good to be true, it probably is. If you are tempted to invest in something that you aren't 100% sure of, consider it a gamble and don't commit more money than you are willing to lose.

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