Are you invested in a Ponzi scheme?

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The promise of such high “guaranteed returns” raised red flags for me immediately. Photo: supplied
The promise of such high “guaranteed returns” raised red flags for me immediately. Photo: supplied


"Do you think this investment is legit?” is a question we receive at least once a week. It is great news that people are starting to become more aware of the number of fraudulent schemes being peddled out there, but it is concerning that they still want to believe in the impossible. Even when they know that an offer is not feasible, there is still the lure of large returns.

Last year, an acquaintance asked me about an investment he had made with a company that was claiming to give returns of 3% a week (12% a month) by investing in “crypto and forex”. He had invested money after friends recommended it to him.

The promise of such high “guaranteed returns” raised red flags for me immediately. Moreover, how could they be paying such returns when crypto assets have collapsed?

READ: North West Couple accused of running R65m pyramid scheme

Another red flag was that they paid better profits if you referred friends and family – a classic pyramid structure.

A quick look at the website and a bit of research on Google revealed that the person behind the scheme had been implicated in previous Ponzi schemes – not a good start. The investment was in a country with weak financial regulations (the Grenadines) and investments were made via credit card – all signs that this investment was most likely not legit.

I suggested that he take his money out as soon as possible. The company had a three-month “lock-in” clause and, to be honest, I was surprised when, after the three months, they actually did pay him out.

The key behind any successful Ponzi scheme is that it initially pays out to investors, who then refer others and encourage them to invest more cash into the scheme.

READ: Almost 7 000 bitcoin still missing in SA crypto scheme

In fact, some unscrupulous investors have become good at identifying Ponzi schemes and they work the system. They invest early and draw out their capital and growth before the whole thing goes belly up.

Successful schemes can run for a relatively long time and early investors do make money. When journalists warn about a potential Ponzi scheme, the founders threaten lawsuits and investors even send death threats. The amount of money they make depends on how long they can keep the scheme going.

That is why the SA Reserve Bank has made it illegal to invest in a Ponzi scheme, even if you do so unknowingly. Ultimately, the money you receive is not from any genuine investment activity, but from other investors. This is stealing, not investing.


The Netflix series Madoff: The Monster of Wall Street, about Bernie Madoff, who ran a Ponzi scheme in the US for more than 20 years, makes for fascinating viewing. It provides insight into how even wealthy, financially astute individuals are entrapped by these schemes.

South Africa had its own Madoff in the form of Barry Tannenbaum, whose Ponzi scheme collapsed around the same time as Madoff’s did in 2009, after four years of conning many wealthy individuals out of an estimated R12.5 billion.

In his testimony, Madoff confirmed that he had never made a trade and that all returns paid out were from new investors.

Tannenbaum’s victims included a former CEO of Pick n Pay, a one-time head of the JSE and a former boss of OK Bazaars.

In retrospect, it is easy to see that Madoff was running a scam because his operation had all the red flags we are warned about. He offered guaranteed returns well above the market rate; he never made losses even when the markets fell; and when anyone asked any difficult questions, he just fobbed them off.

READ: I made a lot of people rich: Madoff

He told investors that, if they wanted to ask questions, they could take their money elsewhere.

He created the perception of a secret club, making his investment “exclusive”; something you wanted to be a part of.

Investing in Madoff’s fund made you an “insider”; it was a status symbol and investors were so afraid of being excluded that they didn’t ask questions.

Tannenbaum’s scheme was similar in this regard – it was marketed to wealthy insiders and had the added sweetener of being a way to circumvent exchange controls and avoid tax.

Ponzi schemes appeal to our greed. If your investment keeps giving amazing returns, why walk away?

Yet it is those very returns that are the biggest red flag. When an investment promises any return above cash, the first question you need to ask is: What is it invested in?

Madoff claimed he was using a hedging strategy that made money whether the stock market rose or fell. He was seen as a sort of wizard who could select the correct stocks every single time.

Tannenbaum claimed his fund was invested in the components used to manufacture HIV/Aids medicines, and offered returns of up to 200%.

Nowadays, most Ponzi schemes focus on crypto assets and/or foreign exchange, such as the Mirror Trading International scheme, which went into liquidation in 2021.

The rise in the value of cryptocurrency (prior to last year) made this claim seem believable to investors. But even Bitcoin never went up in a straight line.

The same rules always apply – if it seems too good to be true, it is.

Fraudsters come up with all sorts of smoke and mirrors, and use all kinds of fancy jargon to pull the wool over even financially sophisticated people’s eyes.

Don’t think that this time it is different – the only thing that’s different is the marketing story.

When in doubt, read the Consumer Protection Act, which states that a pyramid (multiplication) scheme “exists when a person offers, promises or guarantees to any consumer, investor or participant an effective annual interest rate … that is at least 20% above the repo rate”.

We live in a world where facts and fiction get blurred
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