How to avoid a Ponzi scheme
CNNMoney's Zain Asher explains how a Ponzi scheme works and how to avoid falling for one.

So have you ever heard the phrase if it’s too good to be true, then I don’t know, it probably is?
I think whoever coined that phrase was probably talking about the Ponzi scheme, so that’s a scheme, that’s a fraud that uses new investor money to pay back old one, so

let me give an example.
So let’s say John managed to persuade Ringo to invest $100,000 in his firm, and then every year after that, John begins to pay Ringo $20,000 a year. So Ringo just like anyone else would be, is really happy, thinking, yeah, you know, look at these great returns, I’m so excited, look at my amazing returns. Though unfortunately, what Ringo doesn’t realize is that John is using Ringo’s original investment to pay him that money. So that money is actually coming from Ringo’s original investment. And then you have Paul jumping in, paying another, $100,000 to the firm, and the fraud sort of grows, it gets bigger and bigger. I think the person who would know the most about Ponzi Schemes is Burney Madoff, he actually run a 65 billion dollar, 65 billion dollars is a huge amount, a Ponzi scheme and it began to unravel when some of his

investors began to pull their money out of the firm. And he didn’t really have enough money to pay some of the other investors, and that’s how he was caught.
Ok, well, what sort of things should I watch out for?
Okay, so anyone guaranteeing little or no risk, that’s a red flag, because trust me when I tell you that every single investment has some degree of risk. Another red flag, possibly overly consistent returns, because nothing goes straight up. And according to the SEC, other red flags could be unregistered investments, unlicensed sellers, issues with paperwork as well. But in case you are wondering where the Ponzi scheme got its name from, the answer is a man named Charles Ponzi, it’s about 100 years ago, he managed to defraud investors in new England of roughly 20,000,000 US dollars, so that’s how the Ponzi scheme got its name, and sadly we are still falling for them today.