Throwback Thursday: How to Spot a Ponzi

Chain mailGet-rich-quick schemes snare many people looking for a golden opportunity. Often these innocent victims find out too late that their cash cow is a savings drainer. In “How to Spot a Ponzi,” former Marriott School dean Ned Hill outlines a myriad of ways to identify shady schemes. Here are the top five:

1. Sweet Deal

If it sounds too good to be true, then it’s probably a scam. “A few years ago, kids came through Provo neighborhoods selling…coupons that cost $30, which allowed you to receive thirty boxes of cereal delivered to your home,” Hill recalls. “That sounded too good to be true. Sure enough, the cereal did get delivered for the first two or three weeks, but then there were no more deliveries. The coupon holders called the originator, but the firm was nowhere to be found.”

2. Easy Pay

If you’re offered a job where there is little or no work involved and are promised a large income, it’s probably not a legitimate business. “These schemes aren’t opportunities at all,” Hill writes. “They’re a way to transfer money from your pocket to someone else’s.”

3. New Recruits

If your income is based on quickly and continually recruiting more people to work under you, it’s probably a pyramid scheme. “The key to Ponzi schemes is that the returns come from new investors and not from any real economic activity,” Hill explains. “It has to grow rapidly or the promised returns cannot be paid and whole scheme falls apart.”

4. Risky Business

If a company fails to point out the sources of your investment’s large return and does not mention any risks involved, then you’re probably being conned. “Remember the risk-return trade-off—if somebody promises you a high return, there’s also a high risk,” Hill cautions.

5. Ethics Emphasis

If the company’s business practices seem sketchy or unethical in any way, then it’s not a company you want to do business with. Hill recommends checking in with the Federal Trade Commission, which curates an online list of current scams.

Get Hill’s full advice on how to avoid scams in the Fall 2007 issue of Marriott Alumni Magazine.