Ponzi Scheme? Don't Be a Victim -- Read These Anti-Madoff Tips Now

NEW YORK (TheStreet) -- It is hard to believe that investors are still falling victim to Ponzi schemes, despite all the news surrounding large scams like the Bernie Madoff case -- but they are. And in the technological age we are living in, scams are becoming more complex and more difficult to spot.

On Wednesday, the former Index CEO Masami Ochiai and his wife Yoshimi Ochiai were arrested in Japan for allegedly inflating profits and other financial statistics by round-tripping, in violation of the Financial Instruments and Exchange Law.

On Tuesday, the CEO of Amway India was arrested for allegations of financial irregularities in Amway's operations. Duh -- everyone knows that Amway is a scam.

On Saturday, Iranian billionaire Amir Mansour Aria was executed in Iran for an alleged $2.6 billion bank fraud. 38 other people were also charged in the case.

And not all Ponzi schemes make national news like the Madoff case or Florida lawyer Scott W. Rothstein's case. However, it is clear that all Ponzi schemes have the same end result.

Investors lose gobs of money. 

These fraudsters can entice anyone with their strong returns and promises of low risk. What's more, these schemes are usually run by a trusted family friend or professional.

To spot a scam, here are some questions you should ask yourself.

  • Do you understand your investments and investment strategy?  
  • Are you able to review account statements upon request, without delay?
  • Is the person or company you are investing with licensed by FINRA?

If you answered "no" to any of these questions, you may be in a Ponzi scheme.

So how can you avoid these scams?

You really don't need to know every detail of your investments -- that's why there are brokers and investment funds, after all. But if the investment is confusing, or in any way questionable, you should check into its validity.

Your investment statements should be clear and without error, and available upon request. If they are not, this is a big red flag, and should be investigated.

If the person isn't licensed, you should not invest with him or her. You shouldn't hire an unlicensed contractor to build your house either -- same idea.

Other questions you must ask yourself:

  • Are you receiving large returns from your investments over a short period of time?
  • Are your large returns exceedingly consistent?
  • Are your investments subject to very low risk, at least according to the adviser's claims?
  • Are your investment payments sometimes late?

If you answered "yes" to any of these questions, you may be in a Ponzi scheme. Read more on how to avoid them on page 2.

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If you are receiving more than a 10% annual return with little or no risk, the investment may be questionable. Some investments can offer a larger-than-10% return, but no investment like that has zero risk. Real investment returns fluctuate. Consistent returns are not in and of themselves a bad thing, but consistent high returns in consistently short periods of time, with no risk, should be questioned.

A certain amount of skepticism is healthy and necessary when investing. If your investment payments are questionably late, or if you are getting excuses as to why payments are late, those are red flags, too.

Everyone wants high returns from their investments. That is why Ponzi schemes are seductive. The problem with getting high returns is that no one wants to admit the shakiness of their investment when they are making such high returns.

Here are few important ways to protect yourself from being victimized by this scheme or any financial scam.

1. Diversify your portfolio. Never have more than 1/4 of your investment capital in one product. Spread out your investments to protect yourself. That way, if you do fall prey to this scheme, you won't lose everything.

2. Make sure your advisers are accredited. This can't protect you all by itself -- look at Bernie Madoff and Scott W. Rothstein. But do your homework. Be diligent. Be skeptical of high returns, and remember you are dealing with money. People do a lot of nasty things for money.

3. Take extra precautions if you are in retirement, or nearing retirement age. Unfortunately, retired people fall victim to this kind of scheme more than anyone else, and it is harder for retirees to bounce back from these scams.

4. Learn as much as you can about your investments, and stay involved. Get statements and reports. Ask questions and demand answers. Withdraw from the account if you don't like the looks of it. If there is a problem, you should be alarmed.

5. If you have doubts, stick with your gut feeling. You'd be surprised how many people say, "I knew something seemed wrong." 

6. Don't judge your investment decisions on the adviser's physical appearance or how nice the person is. Many people think that just because a person drives a fancy car, dresses well, has a nice house and job, etc., that he or she must be making the right financial decisions. This is false logic. Don't let someone else buy a yacht with your money.

7. Don't be afraid to expose a fraud or abuse. In the best case, you were simply wrong. But in the worst case, you may be facing a disaster.

8. Do your homework. Don't be afraid to check out your investments with the following resources. It's easy, it's free and there is no harm in exercising due diligence.

Here are some resources to help you avoid being the victim of a financial scam. It's worth doing your homework -- because it's your money.

>>Read More: Madoff Con Reaches Global Proportions

>>Read More: 1 in 5 Senior Citizens Fall for Financial Scams

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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