What do Bernie Madoff and Melissa Caddicks have in common? Aside from coming to an untimely end for both of them, they were the architects of Ponzi schemes that fleeced investors of billions and millions and lasted for a number of years. Bernie Madoff scheme went for seventeen years and involved US$65 billion while Sydneysider, Melissa Caddicks, masqueraded as a Financial Adviser for several years, netting over A$31 million of which only $7 million has been recovered.

How do these occur and why do they continue to occur?

Firstly to definitions; “Ponzi scheme” was named after Charles Ponzi, an Italian/ American swindler and conman from the 1920’s. These schemes work on investors putting monies into a fake investment scheme with the scheme being masked by funnelling returns to clients from monies being contributed by new clients.

The conditions are ripe for these schemes with record low interest rates, term deposit returns at record lows and share and property markets at record highs. ASIC is reporting the greatest increase in scams ever seen. So what are the characteristics of these schemes and who do they target?

The characteristic of many of these schemes is that they lure the investors in usually from the word of mouth reports of other investors and of course their elaborate websites. Secondly, they use a vocabulary of words that investors like to hear – “safe as houses”, capital that is “guaranteed”, as safe as term deposits but with “better returns”. We only have to witness the recent Mayfair Investments (now in liquidation), where investors were lured by the prospect of safe returns paying more than term deposits, when in effect they were investing in land development in NQ resort locations.

This was a failure of investors to follow up on where the monies were invested and to smell the risk.

Secondly, these fraudsters invest in elaborate marketing and the quality of their materials and investment reporting is excellent. In the Caddicks case, the Commsec account details were an exact duplicate of normalised Commsec accounts. There was no difference on the face of the reporting. Madoff produced fake investor statements for some 17 years without investors ever querying the veracity of the statements.

Characteristically, what stands out most, is the elaborate lifestyle these fraudsters project. They appeal to that inner sense of envy; you could drive the cars I drive, lives in the houses I live in and share in the holidays I take, if you come on the journey with me.  Invariably, in most cases where investing is involved, they are a variant of a ponzi scheme and the lifestyle lie is being funded by the misappropriation of client funds.

Which speaks also to the character of these people who in most cases exhibit Psychopathic behaviours marked by lack of empathy for those they do harm to, deficient feelings of guilt and poor behaviour controls where they always feel entitled.

Why they last so long is because investors are often ashamed to speak out. That is the sad fact.

How do you protect yourself?

Firstly, you can check if these people are licensed and their history through the ASIC website.

But that goes so far. You can still be licensed and be crooked.

So the next check is to follow through on where the investments are domiciled (which registry) and whose name they are in. In the Opes Prime collapse in 2008, investors thought they owned the underlying securities, but in effect they were leveraged against the debt of the Company. This is where most of these schemes can and should fail, if investors were to go to that extra level of diligence. Also remember the adage; “ If it seems too good to be true it often is”.