With Ponzi schemes repeatedly in the news and especially with Anthony’s Vassallo’s arrest in Sacramento this morning, many people are wondering how to avoid a Ponzi scheme and if their money is safe. Although, I didn’t know Vassallo personally, I unfortunately did know some of the investors and potential investors, whom I advised to avoid the “investment”. I thought I would echo some of the advice I gave those folks on how to avoid a Ponzi scheme.

1. If it’s too good to be true – it is! From what I heard, Vassallo was promising 3% return per month every month. That’s crazy! Even Bernie Maddoff didn’t make such a high promise.

2. Deposits are made to the “Investor” not a custodian like a brokerage firm. That allows the Investor to take “Custody” of the money and with it control. For instance, when my clients deposit money into their accounts, they wire or write the check directly to J.P. Morgan right into your personal account. I never touch the money, and as far as I’m concerned, no advisor or broker ever should.

3. Statements come from the “Investor” or possibly a third party custodian. This leaves the open the possibility of false statements and funny business. Once again, for instance, my client statements come directly from J.P. Morgan.

In addition, be particularly cautious when an investment opportunity emphasizes:
- Very high yield;
- Quick return;
- "A once in a lifetime" opportunity
- The chance to "get in on the ground floor

It is impossible to describe thoroughly the various forms Ponzi schemes might look like, but I hope I have given you some help in not only avoiding them but in feeling more comfortable that your money is safe.

If you or someone you know would like me to review their investment program to make sure it isn’t “too good to be true” or simply just want an honest 2nd opinion, just give me a call.

Cheers –Keith
916-925-8900

What is a Ponzi Scheme?

Named for Charles A. Ponzi, who defrauded hundreds of investors in the 1920s, a Ponzi scheme pays off old "investors" with money coming in from new "investors." It works this way:

Example: Investor A ("A") $1000 on P's promise to repay $1000 plus $100 "interest" in 90 days. During the 90 days, A makes similar promises to Investors B and C, receiving $1000 each from them. At the end of the first 90 day period, A may offer to pay B and C the $100 "interest" and to return the original $1000. More likely, he will invite B and C to "re-invest" the $1000 plus the $100 "interest" for a similar, or higher, return at the end of another 90 days. Thereafter, Baand C, believing he or she can receive a good return on the investment, is likely to bring other investors to A.

In this manner A collects a pool of money that he can use to pay out to those few wishing return of their money. A may operate his scheme for some time before "pulling the plug" - that is, either disappearing with all the "investments" or revealing the bad news that the investments went "sour." A major factor in the eventual collapse of a Ponzi scheme is that there is no significant source of "income" other than from new investors.

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at/i>
916-925-8900 or Keith@KeithSpringer.com