| Kelly Kesner: |
I’m Kelly Kesner with this week’s Investor’s Watchdog University installment. I’m here with Pat Huddleston, who’s the founder of Investor’s Watchdog, and we’re here to answer a very important question today which is, what is a Ponzi scheme? |
| Pat Huddleston: |
Right. A big word since December of 2008, right? People have heard that a lot in connection with Bernie Madoff, but some people still don’t understand exactly what a Ponzi scheme is as distinct as some other kind of investment fraud. What distinguishes a Ponzi scheme is that the person running the scam is using money put in by later investors to pay earlier investors and so he seems to have a profit generating engine, a way to spit out cash, a return on your investment that you don’t find out until too late that you just get your own money back or you’re getting somebody else’s money back. |
| Kelly Kesner: |
You often hear the terms Ponzi scheme or pyramid scheme used interchangeably. Are they the same thing? |
| Pat Huddleston: |
Not necessarily, Kelly. A pyramid scheme is you can think in terms of a pyramid. It usually is something like a multi-level marketing program where your responsible once you’re in the program to recruit so many additional people, and then they recruit so many additional people, and so on and you can see how that spreads out into a pyramid. Now, there are legitimate multi-level marketing programs. Some multi-level marketing programs become pyramid schemes and if they use later investor money to pay earlier investors become Ponzi schemes, but they’re not necessarily the same thing. |
| Kelly Kesner: |
I’ve seen things warning that if an investment promises outrageous returns, that that’s usually a red flag that it’s a Ponzi scheme. Is that true? |
| Pat Huddleston: |
Well, it should be a red flag. But, please, please, please, don’t believe that that’s the chief identifying characteristic of most scams that are out there. What we say at Investor’s Watchdog is if it sounds too good to be true, you’re talking to an amateur. No competent scam artist and most of them are competent is going to promise you something that’s too good to be true. And so, yeah, if something sounds too good to be true, by golly, it is true and you should stay away from it, not only that you should call the regulators, but if it sounds perfectly legitimate you might still be in danger. |
| Kelly Kesner: |
What are some of the hooks that would get an otherwise smart investor to invest into a Ponzi scheme? |
| Pat Huddleston: |
First, it looks completely legitimate. Again, most people who do this are competent at their jobs just like you’re competent at your job. They know what they’re doing. They’re too smart to promise something that looks stupid and first of all, if you could make up anything in the world, which they can, why not make up something that sounds plausible, right? And they do. But, the other thing that really draws people in is something that we’ll talk about a little bit further down the line, a sales technique called “the test drive”. They give people a taste and make people believe that they’ve seen it work with their own eyes. |
| Kelly Kesner: |
So, these are very well planned out productions? |
| Pat Huddleston: |
They are, yeah. |
| Kelly Kesner: |
Well, that is our basic class on Ponzi schemes. We’ll see you next week with more information. Until then class dismissed. |
| [Music playing] |
| [End of Audio] |
