How To Spot An Investment Scam

In 2009 one of South Africa’s biggest Ponzi schemes, spearheaded by Barry Tannenbaum and his lawyer sidekick Dean Rees, cost investors over R12.5-billion.

Barry Tannenbaum’s giant of a scheme lured even the most financially astute individuals, including top executives in some of South Africa’s largest companies. For those who put their hard earned money into the hands of the swindling duo it was a painfully expensive lesson in treading the fine lines between emotion, patience and greed when investing.

What is a Pyramid Scheme?

A pyramid scheme is structured like a pyramid. Usually it is started by one person or a small group of people and participation in the scheme requires that new recruits pay a certain fee to join the scheme then recruit a number of people to recoup their membership fee and reap other ‘benefits’. However, people don’t reach their recruitment targets and the monies that they’ve paid into the scheme aren’t recovered, thus enriching the people at the top.

Pyramid schemes are unsustainable in that they are finite – eventually the structure collapses because you will run out of people to recruit as the base of the pyramid gets larger.

What is a Ponzi Scheme?

This scheme is named after Carlo “Charles” Ponzi, who set up The Securities Exchange company in 1920 where he offered investors magnificent investment returns in a very short period of time. His ‘products’, he claimed, could yield up to a 100% profit on a 90-day investment.

Other types of scams

There is a rise in FOREX scams in South Africa which operate locally and internationally. People lose thousands of rands because FOREX trading is a highly specialized field of trading and cannot be learned overnight and they end up making trading errors.

There’s also been a surge in online “stokvel” scams in which claim to operate as ‘connectors’. Look out for online ‘investment clubs’ that claim not to be a deposit taking institute but still require that you transfer money to accounts, or that you recruit people in order to be paid a profit on your ‘investment’.

SMS messages claiming you’ve won a competition you didn’t enter and chain emails are also scams to be aware of.

How to spot the scam?

Investment scams can be very difficult to discern from genuine investment opportunities because some of them are elaborately set up and a lot of work has been put into giving them an authentic feel. However, there are always warning signs. Here’s what you should look out for:

  1. Member recruitment: This is a classic trait of a pyramid scheme. If you have to recruit other members in order to make a profit from their membership fee and you rely on them recruiting more people in order to make more money, then you need to watch out. There’s money being channelled straight to the top and you’re doing all the work
  1. You are pressurised into signing documents at special events: These special events are offered as completely ‘exclusive’ events where the only way to be a part of the scheme is to attend an event. Do not sign any documents, divulge personal information, or part with money before you’ve done your homework.
  1. High returns in a short period: Investment scams usually come with the promise of high returns in very short periods. The scheme eventually collapses when the company can no longer pay out investors or when it is found out by a governing body.
  1. Little or no risk is mentioned: Any broker you speak to will be sure to highlight risk when it comes to investing. Guarantees of exceptionally high returns with no risk should be regarded with suspicion.
  1. Look for accreditation or registration with the Financial Services Board (FSB): If there’s a product offering of some sort, then usually there’s a governing body that companies have to be registered with.
  1. If it’s too good to be true, it probably is: This is the golden rule. If you are promised high returns in very short periods of time, walk away. When it comes to investing, there’s no such thing as quick money – and if it’s quick, you’ll probably lose it just as fast.

 

Source : timeslive.co.za

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