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Question:


Investment fraud seems to be more and more rampant. How can I avoid being a victim of a Ponzi scheme?
-NervousNickels


Answer:


I don’t know that fraud is more rampant now than at other times over the centuries, at least in relation to the amount of money floating around in the economy and financial markets. The Bernard Madoff scandal was the biggest ever, with losses estimated at $65 billion, but that’s just one case. Madoff was a classic Ponzi scheme, where money from more recent investors is used to pay earlier ones to make it seem as though the perpetrator is investing successfully.
 
There have been other recent cases of financial fraud, but the big ones seem not to have specific victims. They involve insider trading, for instance, or market manipulation. The most notorious example of that is the Libor scandal, in which banks misstated the rates they paid to borrow money from one another, which in turn led to incorrect calculations of a key interest rate used to set rates on other loans.
 
One reason that it may seem as though fraud is more prevalent is that the financial crisis is still fresh in people’s minds. Whatever trust the public had placed in banks until then was severely eroded and will be slow in coming back. As for how to avoid being taken in a fraud scheme, it’s simple. Do your homework on any investment you plan to make, as well as on the people running the money. Most important, be circumspect to the point of skeptical and realize that any prospective return that seems too good to be true probably is.
-Conrad de Aenlle



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