A Ponzi Scheme, A Sports Team, and Your Money

Sep 15, 2011

After the Bernie Maddoff scandal in 2009, most people have heard the term Ponzi Scheme used at least once or twice. So what is a Ponzi Scheme, anyway? Well, Dictionary.com says it is a form of fraud in which success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors. Let’s try to use an example.

In our example, Ponzi guy, Dave, creates a fake shoe company. Dave promotes his amazing new shoe company idea to potential investors. He tells an investor, let’s call him Frank, that each year he will receive a percentage return on his investment, based off profits from shoe sales. Franks buys into the idea and decides to invest $100,000. Now, of course there are no profits from sales, because the business is made up! So, Dave must use investor’s money to pay fake profits back to investors. Money comes in from one client as an investment, and out to another client as profit from company earnings.

Three years later, Frank has received a 20% return on his money each year, totaling $60,000. Frank is ecstatic about his investment decision and decides to tell all his friends about this wonderful company. This is exactly what Dave wants; the more investors, the longer this Ponzi scheme can continue. Ten years later, thousands of people, via word of mouth, have invested in the shoe company and have all profited 20% return per year, while Dave becomes a quick millionaire as he pockets some of the money for himself.

Then, one day new investors stop contacting Dave. As this inflow of new cash comes to a halt so do “company profits”. Finally, Dave has no way of paying returns to his current investors since no new money is coming in, so people start asking questions and the Ponzi scheme blows up.

So, what happens when Ponzi meets sports? A Miami Hurricane Football scandal is born. A super fan with a Ponzi scheme wants attention from players on his favorite college team, so he pays them thousands of dollars for whatever their heart’s desire. He thinks the players are his true friends, but really they just love the free cash, entertainment and lifestyle. He gets in trouble for a Ponzi scheme and no players support him during his time of need. Finally, Ponzi boy’s feelings are hurt, he spills the beans about the NCAA rules violations concerning amateur players receiving money, and the program implodes…the end.

So you may be wondering, what does this have to do with anything? I’m not sure, but I bet those players had a lot of fun.

How do you avoid a Ponzi scheme? Over the next 20 years, at some point you may hear, see or learn about some form of Ponzi scheme. It may be via e-mail or from a friend, but here are a few ways to decipher Ponzi from non-Ponzi.

  • Are return astronomical, like 20% per year?
  • Are the returns consistent each year, no matter how the stock market performs?
  • Does it all sound too good to be true?
  • Be skeptical of pitches for exotic or obscure products
  • Use the internet! Research the person, check for legitimacy of credentials
  • Always keep the money in your name. Never invest by writing a check to the investment guy.
  • Does the guy have slick black hair and use phrases like, “Ahh, I know a guy” or “You know what I’m talkin’ about!?”

Always try to protect yourself from con artists, even when you're wearing pads.

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