Sometimes we are offered an opportunity for investment that seems too good to be true. How can we tell if it is a scam? A recent case called “Chartwell Enterprises” illustrates the main points of a scam.

Chartwell Enterprises claimed to invest money into commodity and currency trades and paid a fixed rate of interest – generally 20 – 40% per annum, and kept any returns about that figure. The regulators were alerted to this company after some investors were late in getting their interest payments. The company had been paying the returns to existing investors from new funds – this is called a Ponzi scheme.

They used their own twist – they recruited existing customers to entice others to invest, paying them up to 50% of the amounts invested.  This should have been an immediate danger sign – how could they make up that missing amount?

Now the money is missing, and the directors are facing criminal charges.  The case illustrates some common points of a scam:

Investment is less important than marketing – Good investors don’t need to find smart money – it finds them.  This company’s focus was on marketing (particularly pyramid style marketing) with no investment for several years.  Many successful traders are very reluctant to take on new money, and certainly don’t seek it out.

Lack of transparency and accountability – A real investment house must spend a lot of time and resources on compliance activities.  It is able to account for all investments.  The Chartwell case illustrates the lack of formal reporting and compliance systems.  There were no formal accounts, and no income tax returns had been filed for several years.

Unrealistic guaranteed returns – Nothing is guaranteed in this world.  If you want a sure thing, buy a treasury bond where the government can print some more money to pay it – even then you’ll lose to inflation.  If you see guaranteed returns that are much higher than bank interest, you will know that it is probably a scam.

Vague about actual investments, and self proclaimed expertise – Someone who is honest will have no trouble in explaining where your money is invested and what they are doing.  A legitimate professional investor generally does not need to claim that they have special expertise, or be vague about their investment approaches.

Not regulated and does not comply with investment laws – A good fund manager will comply with government or industry regulation, and have appropriate approvals.  Chartwell was not properly regulated, and was not an approved CTA or investment adviser.

Investment is always risky, but good risk management can overcome many of the potential downfalls.  However, there is always the chance of losses when markets meltdown, and liquidity dries up.  That is the risk of this game.

However, criminal fraud and Ponzi schemes are a completely different matter.  They are not a risk of the game, but something that needs to be completely avoided.  Look for these signs before investing your hard earned money.

Tags: forex, futures, ponzi scheme, scams

This entry was posted on Thursday, May 8th, 2008 at 12:27 pm and is filed under Scams to Avoid. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.