In 2019, Jordan Maglich of PonziTracker.com released a 10-year survey of Ponzi schemes in the U.S. What he found confirmed what many Utah financial advisors have suspected for decades: Utah has the highest number of Ponzi schemes per capita in the country. Despite the fact that so many Utahns have fallen victim to unscrupulous financial advisors, many people still do not understand what Ponzi schemes are and how to keep from falling victim to their perpetrators.

What is a Ponzi Scheme?

In the 1920’s Charles Ponzi began his business by promising clients profits in excess of 50 percent as he bought discounted postal reply coupons in foreign countries and redeemed them for face value in the US. This practice, known as arbitrage, left Ponzi flush with cash in a short period of time. Instead of taking advantage of the price difference between countries and passing along profits to investors, he used the money from new investors to pay earlier investors. While this process was not new, Ponzi became the face of the crime when, after more than a year, the whole scheme collapsed, costing his “investors” more than $20 million. Today, the process of creating an “investment opportunity” that relies on later investors capital to pay earlier investors is known as a Ponzi scheme or pyramid scheme.

From 2008 to 2018 alone, more than 800 Ponzi schemes have cost the public $60 billion. The fact that Ponzi schemes typically use relationships to find new “investors” categorizes it as affinity fraud – a form of fraud in which the perpetrator uses their membership in a group or religion to gain trust of potential victims.

The Financial Impact in Utah

In total, Utah investors lost more than $1.5 billion to Ponzi schemes over the last decade. That doesn’t even include other types of affinity fraud that cost investors another $500 million in the state. With 1.35 Ponzi schemes per 100,000 people, Utah has the highest per-capita number of Ponzi schemes in the country – two-thirds higher than the next state (Florida)! Perhaps even more startling is the fact that if you exclude the Madoff scheme, Utah also has the highest dollar loss per person anywhere in the country. Utah has lost an average $502 per person to Ponzi schemes, which is double the next highest state.

What Makes Utah Such a Target?

Economists, financial advisors and attorneys attribute these startling statistics to three key characteristics found in many Utah communities.

Utah’s Tight-Knit Social Structure

Whether it is because of the predominant religion in the state or simply a strong sense of community, Utahns live in a tight-knit social structure. While this social structure is ideal for creating safe communities, it is a breeding ground for Ponzi schemes. Inevitably, someone knows someone who is seeing massive returns, which only perpetuates the fraud.

A Trusting Population

In general Utah residents are also trusting people. They respect authority and assume the best in people. Again, these traits lead to many positive outcomes, both socially and economically. However, it can also lead to affinity fraud. Ponzi schemes tend to prey on these feelings of trust by using neighborhoods, political leaders, religious leaders, and community figures to create common bonds with victims.

A Desire to Increase Wealth

Although not unique to Utah, the desire to grow their wealth, combined with the other two key characteristics makes Utah residents particularly prone to investing in Ponzi schemes. Many Utahn’s live in single-income households and have more children than the average American – creating additional financial stress on those families. In addition, the belief that financial blessings come to the righteous can create unrealistic expectations about the risks involved in investing. While many Utahn’s have the best of intentions and sincere desires to do good for their families and communities, we must learn to exercise more caution when it comes to investing our money.

How do I Protect Myself?

While Ponzi schemes are more common here in Utah than anywhere else in the nation, it doesn’t mean being a victim is inevitable. I recently wrote a piece on retiring in Utah for the Utah Financial Advisor Network where I briefly discussed how to protect yourself from Ponzi schemes. I will elaborate on that list here:

Be a skeptic. Anyone promising large rates of return in short periods of time should be met with a healthy dose of skepticism. Likewise, someone promising high returns with little risk should be avoided. In short, if it sounds too good to be true, it probably is.
Ask questions. If you do not understand the product or service someone is selling, and they cannot or will not explain it to you so you can, do not hand over your hard-earned money. Many Ponzi scheme perpetrators rely on a person’s inability to follow complex jargon. Keep asking questions until you understand what they are saying and then ask again to see how well their story stays together. If you aren’t an investing expert, solicit the help of a trusted advisor to help you with your due diligence.
Say “No” to unsolicited offers. A good question to ask yourself is, “Why are they offering this investment to me?”. There is no shortage of willing investors out there. If this is such a great investment why haven’t others jumped on board? Don’t be convinced that this is a “one-in-a-lifetime opportunity.” There are lots of ways to raise money. Approaching individual investors to pitch an idea is the last resort. So again, why are they coming to you? Probably because everyone else already said “no”.
Check out their credentials. The Financial Industry Regulatory Authority’s (FINRA) maintains a database on brokers, brokerages and financial advisors called BrokerCheck. A person’s credentials along with negative information about their personal dealings can be found there. Of course, a clean record is not enough, but it should be a minimum requirement.
Beware unregistered investments. The Securities and Exchanges Commission (SEC) does not require all investments to be registered, but beware of those that are not. Begin by asking why an investment is not registered with the SEC and then contact the Salt Lake Regional SEC office for more information about the investment.
Use a qualified custodian. If you are investing in a startup or similar venture, then you’ll have to cut a check directly to the business. But most investors are probably best served avoiding such risky ventures. If you are investing in publicly traded securities like stocks, bonds or mutual funds, you should make sure your accounts are held at a qualified custodian like TD Ameritrade, Schwab or Fidelity. These firms’ primary function is to keep your accounts safe from fraud and theft. If you are investing in a hedge fund with “commingle” assets – meaning your money goes in one pot with everybody else’s – just realize you are putting yourself at a much higher risk of fraud.

The Effects of Ponzi Schemes in Utah

We often think of Ponzi scheme victims as simply being defrauded out of their hard-earned money. What we don’t often consider are the second and third order effects of this type of crime. Each year, millions of state resources are used to support victims of fraud who cannot afford food, medication, or other living expenses. Often, families of victims must step in to support them if they are no longer financially self-sufficient.

Beyond the financial impacts are the social and emotional impacts. Being defrauded by a religious leader or close friend often has far reaching effects on a person’s ability to trust again.

Having a tight-knit social structure and trusting population are qualities that make Utah a great place to live, work and retire. The answer to combating Ponzi schemes is not to change how we are as a people, but to simply be cautious and wise about how we invest.

If you need a second opinion on an investment you’ve made, or that you are considering making, you can schedule a complimentary, no-obligation introduction here.