Charles Ponzi, the Boston financeer and swindler, has come to symbolize the idea of fradulent investment operations where investors are paid handsome returns by subsequent investors rather than from profits. Other nations refer to this activity as illegal pyramiding, but whatever the name, a Ponzi scheme is where the victim of the scheme is forever separated from their money. The victim’s greed gets the best of them and the swindler takes advantage.

With so many large scale Ponzi schemes coming to light as a result of these turbulent times (Bernard Madoff and R. Allen Stanford, to name recent arrests), it is timely to consider how you can easily avoid being victimized by this type of investment fraud. It is really not that difficult. There are three easy questions/checks you can do to avoid the Ponzi pusher.

• Request an investment advisors CRD number – Every registered advisor has a CRD number. The CRD (Centralized Registration Depository) number uniquely identifies an advisor and the history of that advisor is contained in a computer database jointly administered by state regulators and the NASD (North American Security Dealers). You can use the Internet to do a quick check on the advisor given this number . If you request an advisor’s CRD and they either don’t have one or don’t offer to share it, then something is not right. Walk away.
• Read the advisors prospectus document – A financial advisor is either regulated by the state or by the SEC. Both require that they provide a prospectus document which discloses the risk you take as an investor. If they don’t have a prospectus or if you can’t understand it – walk away.
• Ask if your investment is guaranteed – If you ask for a guarantee and the advisor offers one, then run – don’t walk away. Nothing in this life is guaranteed and certainly not some return promised by some investment advisor!

Although these three simple checks do not guarantee that you will not end up as the Ponzi pushers latest victim, there is one other step you can take to make it almost impossible – simply do not hand over your money to an advisor. You cannot end up being a victim of a Ponzi scheme unless you give your money to the Ponzi pusher. A Ponzi scheme requires control of your funds in order to Ponzi you. At some point in the process, the Ponzi pusher will require you to put your money in their hands. It may be that you deposit the money into some investment account that they have set up, or that you write a check to their firm in return for some piece of paper showing that you have made a deposit with them – but don’t do it. Only put your money into an investment account that is in your name, that is with a reputable third party (not affiliated in any way with the investment advisor), and which you have control of.

A legitimate investment advisor does not require control of your money. Their job is to advise you. They are there to help you make investment decisions. Neither requires control of your funds. They may have trading rights that you give them, but they should never have deposit and withdrawal rights to your money!

A Ponzi pusher offers the world and takes yours away. They entice you with “pie in the sky” returns, but give you none. By asking for their CRD number and doing a quick check on them, reading their prospectus, and ascertaining if the returns are guaranteed, you can remove 95% of the Ponzi pushers before they ever get any farther. In the end, though, even if the above fails to protect you, withholding withdrawal access to your funds will defeat their plans no matter how resourceful they may be.

Originally published in the May 2009 issue of
Technical Analysis of Stocks & Commodities magazine.
All rights reserved. © Copyright 2009, Technical Analysis, Inc.

Author's Bio: 

L.A. Little – Author, professional trader and money manager writes daily on His new book, Trade Like the Little Guy (available on, shows small traders how they can consistently profit in the markets. These methods allowed L.A.’s investors to sidestep the huge losses of the past year and actually turn profits once again.