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ScamState | An occasional series on financial frauds

Ponzi schemes want your money to pay off first victims

Ponzi schemes are named after Charles Ponzi, who offered Boston investors outlandish returns by supposedly investing in postal coupons. Many investment scams are variations of the Ponzi scheme, in which early investors are paid off with money put up by later ones to encourage new, bigger "investments."

Example: First International Bank of Grenada raised more than $170-million from investors by boasting of interest rates as high as 300 percent, supposedly earned through trading. The bank claimed assets of more than $26-billion, but had less than $2-million. Deposits were "insured" by the International Deposit Insurance Corp. — little more than a fax machine. Jonathan Kremner of Clearwater, who worked for the bank as in-house counsel, was sentenced to 36 months' probation last year after pleading guilty to selling one of the bank's CDs to an investor and filing a false tax return. He assisted prosecutors in bringing money laundering charges against others.

The promise: You're attracted by tales of high returns, often "insured"
or "guaranteed."

The secret: Little or none of your money is invested; funds are used for sales commissions, investor withdrawals and promoters' lavish lifestyles.

The encouragement: Phony account statements show great returns, prompting enthusiastic investors to spread the word to others.

The letdown: The scheme collapses when flow of new money slows.

Tips for not being taken: Recognize that high yields always come with high risks. If you want an FDIC-insured account, get it from a bank. Check out investments and the people selling them with the Florida Office of Financial Regulation by calling toll-free 1-800-848-3792.

Ponzi schemes want your money to pay off first victims 04/12/08 [Last modified: Tuesday, May 20, 2008 5:06pm]
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