Charles Ponzi was an Italian immigrant who, in the early 20th century, swindled investors by fabricating fictitious investment reports that promised big returns.
However, returns to older investors were paid from money from new investors rather than from the legitimate returns from the investments themselves. Ponzi himself ended up in jail and his infamous legacy – based on his investment frauds – is the term “Ponzi scheme.”
There have been numerous Ponzi schemes through the years, the largest and most famous being that of Bernie Madoff. Convicted of various types of fraud, Madoff is currently serving a 150-year prison sentence.
The largest Ponzi scheme in Washington state history was perpetrated by Darren Berg under the title of Meridian Mortgages. We were victims of this scam.
“Investing is ultimately a matter of trust and faith in the people you work with. Once that trust is broken, as it was in our case, it can never be restored.” ~Peter Langmaid, RSVP Ambassador
Our involvement with Meridian began with our hiring a friend as our investment advisor. What attracted us to his services was that he was independent and worked on an hourly, rather than percentage, basis. Heavily invested in securities, we tasked our friend with getting us into alternative investments. Over time he introduced us to Meridian.
Meridian ran a variety of funds promising ‘reasonable’ returns that could be either reinvested or paid in cash. We started with one fund and it performed as promised. Over a couple of years, we invested in other funds as they became available. We used the returns from some funds for income and others for growth. Besides our money, I also invested money my father left to my children in the form of a trust, with me as the trustee. Again, all performed as expected.
All went well until the phone call from our investment advisor that made my head spin: It had all been a scam, a Ponzi scheme. As the details of the scam were revealed, Berg had bilked hundreds of investors of more than $100 million dollars to fund his lavish lifestyle. Many of the investors were savvy financial professionals. Berg had fooled us all, including the professional auditors who verified the accuracy of his phony financial statements.
At trial, Berg pleaded guilty and was given an 18-year prison sentence. (Note: Berg recently escaped from a minimum-security prison and has not yet been reapprehended.)
I would like to continue this article with clever and foolproof ways to avoid being suckered as we were, and how to distinguish legitimate investments from fraudulent ones, but I can’t. The perpetrators are just too good.
Investing is ultimately a matter of trust and faith in the people you work with. Once that trust is broken, as it was in our case, it can never be restored. I will forever be wary of all investments and investment advice. Although I don’t have advice, I did learn some very expensive lessons.
ONE: Don’t mix finances and friendship. More than the money we lost, we also lost a friendship. I don’t blame our friend, but we’ve become estranged.
TWO: Stay diversified. This becomes more than a cliché when the reality of a substantial loss hits you in the face. Don’t let the collapse of any one investment cripple you.
THREE: Don’t get greedy, especially in retirement when your earning days are over. Stay conservative and avoid opportunities that seem too good to be true, because you know what they say about things looking too good to be true!