In 2009, Nicolas Cosmo was arrested for using his company Agape World, Inc. to commit fraud through a Ponzi scheme. This scandal rocked corporate America once more, and it occurred right after the Bernie Madoff investment scandal, which was another Ponzi scheme. With the United States in the throes of an economic recession, the Agape World Scandal elicited outrage from Americans. Ordinary folk, various business sectors, and politicians all expressed disgust at the level of greed that had overtaken common values such as integrity and honesty.
The Ponzi Scheme: One of the Oldest Tricks in the Book
Named after Charles Ponzi who defrauded millions from investors in the early part of the 20th century, a Ponzi scheme is an illegal investment operation. Ponzi schemes are nothing new. They have existed for several centuries.
A Ponzi scheme is illegal because the return on investment is just taken from the investors’ own money or from the payments made by the next batch of investors. There is actually no profit made from running the business efficiently. People are enticed by the ability to earn a quick buck and fund their dreams and wants. The idea of very high short term returns is so attractive that droves of people just hand over their money as investments, and continue to fuel the investment fraud until it finally collapses or is halted by authorities.
Fraudsters, who aim to use Ponzi schemes to make people part with their money, take advantage of the fact that not everyone is knowledgeable about business and various investment instruments. Promoters of the Ponzi scheme can often use verbose language that sounds very businesslike to the ears of an average person. Often times, they claim that they are using a very proprietary investment strategy that is so top secret they cannot even share it with their clients.
In the beginning, the promoter will pay out very high returns to investors to entice more people to participate. When people get a taste of the high returns, most will opt to keep their money invested. Hence, all a promoter will have to do is just send out a statement of account showing what the person has hypothetically earned. If someone did want out, that person is promptly allowed out to give the illusion that the company is very liquid. In its essence, a Ponzi scheme is just about smoke and mirrors.
The Agape World Scandal
Nicolas Cosmo was a stockbroker in 1990s. Back then he had a gambling addiction and would use his clients’ money to pay off gambling debts. In 1999, Cosmo was arrested on felony charges and was sentenced to almost two years in prison.
A few years after his release from prison, Cosmo established Agape World, Inc., a suburban New York lending business. Agape World was in the business of making bridge loans, which are short term loans that can be taken by businesses while they secure a long-term financing arrangement. Agape World had big time real estate developers as their borrowers.
With the promise of high returns, ordinary folk would invest their hard earned money in Agape World, only to find out that they were scammed. Agape World would later claim that the money was used to pay brokers fess and lost in a failed commodities futures trading. The total intake of the Ponzi scheme was estimated to be $370-$413 million.
Cosmo was later arraigned on charges of mail fraud and was sentenced to 25 years in prison.
Five Ways to Avoid Being Scammed by a Ponzi Scheme
- Be an Educated Investor
Before you even think of investing, you should read up and learn about the process. You want to find out about the different types of investments, the risks, and the returns. If the investment being offered to you is too good to be true and offers higher returns than what you have learned, then it probably is.
- Do Background Checks
You should not take the word of your family and friends that this is a sound investment, and you want to do your own background research on the company and the people behind it to see if the operation is legitimate. Check for SEC filings, criminal records, and any complaints against the company.
- Do Not Put All Your Money in a Single Investment
Diversifying your portfolio is key to lowering your risks of losing everything if an investment goes sour. You do not be too greedy and put everything in a single investment, and you should spread out your money over several investments with varying levels of risks and returns.
- Do Not Make Investment Decisions Using Your Emotions
Fraudsters will ask you about your hopes and dreams and will use the possibility of them coming true to lure you into investing. Remember, investing money is not about making impulsive decisions. Instead, you want to use your head and analyze the kind of investment being offered as well as its risks and returns.
- Monitor Your Investments
You should not just believe the word of your investment adviser, and you want to read the reports and look at the audited financial statements. The SEC has a list of warning signs when it comes to Ponzi schemes. You want to double check to see if any of these are present in your investments.
American society will never be a utopia. There will always be people who let greed rule their lives and will always opt to take the easy way out by taking advantage of a regular Joe. A few months or years from now, another scandal like this one will be shown on the news. That’s reality. All you can do is be on guard and avoid falling as prey for these kinds of people.
Can you suggest other ways to avoid being scammed in a Ponzi scheme?