How to spot a Ponzi scheme


The news that Bernard Madoff was arrested Friday and charged with securities fraud in what federal prosecutors called a $50 billion Ponzi scheme should serve as a warning to anyone asked to give money with promises of getting high returns if they sign up more people.

Hopefully you won't get involved in a $50 billion (yes, with a "B" not "M") scheme, but it's always good to take a look at how to avoid Ponzi schemes, some of the oldest schemes around that date back to the 1920s. They're also called Pyramid schemes and are financial webs that many people learned about in school. I remember learning about them in high school.

But first, a recap of what Madoff is accused of and how he got caught. According to prosecutors and news reports, the former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC was charged with one count of securities fraud. The criminal complaint alleges that he "deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars."