Ponzi Scams Still Bilk Many, Watchdogs Say Senior Citizens Are Among Con Artists' Top Targets

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Ponzi Scams Still Bilk Many, Watchdogs Say Senior Citizens Are Among Con Artists' Top Targets

By John Waggoner, USA Today

January 14, 2004

The mutual fund scandal may be getting all the press, but for sheer harm to investors, the old-fashioned Ponzi scheme is still tops, state securities watchdogs say.

Ponzi schemes, named after flapper-era con artist Charles Ponzi, led the annual list of top 10 investment scams issued today by the North American Securities Administrators Association. In a Ponzi scheme, the con artist promises huge rates of return and uses new investors' money to pay off old investors. The scheme collapses when it runs out of victims.
A scheme last year in California had 3,290 investors and robbed them of $800 million. In Mississippi, 41 investors lost $10.2 million in a Ponzi that claimed to invest in a money-trading program.

Ponzis have two big attractions for criminals, says Barry Minkow, who spent seven years in prison for defrauding investors through the ZZZZ Best Carpet Cleaning Co. No one complains to regulators as long as new investors pour in and payments to old investors are made. And old investors bring in new ones. ''They're unpaid apostles,'' says Minkow, now an anti-fraud investigator.

Seniors are one of the biggest scam targets, because savings rates are so low. One typical ruse: prime bank notes. Con men tell investors that they're getting high yields because they're buying notes from ''prime'' banks, which can pay higher returns. ''There's no such thing as a prime bank. Period,'' says Joe Borg, director of the Alabama Securities Commission.

NASAA named variable annuities as another typical scam -- not for the annuities themselves, but for the way brokers sell them. A variable annuity is a tax-deferred retirement investment that allows you to invest in a stable of mutual funds. It guarantees that your beneficiaries will get at least the amount you invested.

NASAA says investors aren't informed about steep surrender fees, and that brokers try to get investors to switch annuities, which earns them fat commissions.

''There's no widespread abuse that we're aware of,'' says Mike DeGeorge, general counsel for the National Association for Variable Annuities, the industry's trade group.

Independent insurance agents were also on the list, because some get conned into pushing unregistered securities. ''They don't have the training to evaluate securities,'' Alabama's Borg says.

The mutual fund trading scandal, first uncovered by New York Attorney General Eliot Spitzer in September, also got a spot on NASAA's list. But other scams ranked higher. ''Losses in mutual funds are minimal per account,'' Borg says. ''But other scams can wipe out retirement homes and shatter dreams for a better life.''