For 21 years, Allan Goldstein invested with a man who made him money every year. In 1990, U.S. stocks dropped about 6 percent. International stocks fell about 24 percent. But that year, Allen made close to double-digit gains.

In 2000, American and international stocks fell hard. They dropped even further in 2001 and 2002. But during each of those years, Allen still made between 8 and 12 percent per year. He worked hard to save his money. By 2008, the 76 year-old had $4.2 million.

One year later, he was broke.

“Everything I worked for over a 50-year career is gone,” he said. He had to cash in his life insurance to pay his mortgage. In 2009, he was trying to sell his home and he feared it would foreclose. Unfortunately, Mr. Goldstein’s story rhymed with other tragic tales. He was one of thousands of people who trusted Bernard L. Madoff.

Bernie Madoff is serving 120 years in prison. His investment fund was a $65 billion Ponzi scheme. Plenty of Ponzi schemes exist today. Their investors just don’t know it. Here’s how they work: An investment manager takes your money. They offer strong returns without any losing years. They send statements to investors to show how their money has grown. This is what happened with Allan Goldstein. The account statements revealed that his money had grown to $4.2 million over 21 years.

Sometimes, investors added money. Other times, they redeemed some or all of their proceeds. Some took money out to cover their retirement costs. Others might have used it for their children’s education. But Bernie Madoff wasn’t investing money in the stock market, or anywhere else. Instead, when investors wanted money, he took the proceeds from people who were making deposits–people like Allan Goldstein. It’s a classic case of robbing Peter to pay Paul.

None of Bernie Madoff’s investors had ever lost a penny. At least, that’s what they thought before 2009. The financial crisis in 2008 made people nervous. Global stocks were falling. Bernie Madoff’s fund still claimed to be making money. But the economic crisis frightened even his investors. Many withdrew huge sums. As a result, Madoff didn’t have enough cash to cover more withdrawals. The party was over. Madoff knew it. He confessed to his sons, and they promptly turned him in.

Most of his victims hadn’t even heard of Madoff before he was arrested. They watched his arrest on television. They likely felt sorry for his victims without realizing they were victims too.

Madoff had plenty of “feeder funds.” Many independent brokers and pension funds gave their clients’ money to Madoff, without their clients knowing it. Some overseas banks did the same thing. For giving their money to Bernie, he paid them a commission.

These clients’ account statements said they were making money. But the money wasn’t there.

On November 24th, 2009, litigators sued the giant Swiss bank, UBS, for creating funds that invested in Madoff’s scheme. The bank was accused of not taking steps to protect its investors. On December 5, 2009, litigators sought $9 billion from HSBC for the same reason.

You might wonder about the winners: the early investors who withdrew more from Madoff’s scheme than they had put in. Plenty of them were sued too. Some might have suspected their investment was a Ponzi scheme, but most of them didn’t.

Today, bonds, savings accounts and CDs pay paltry interest. Defined benefit pensions are becoming endangered species. This is fertile ground for Ponzi scheme scams. People want strong returns, with the promise of no risk. But everyone needs to know that no such thing exists.

The U.S. Securities and Exchange Commission is trying to educate investors who might be looking at a Ponzi scheme. They identify several red flags.

  1. High investment returns with little or no risk: CD’s, savings accounts and government bonds are low risk. But as a result, they pay low returns. Stocks are considered high risk. Over time, they produce higher returns. But they’ll also produce several losing years. Nobody can produce high winning returns every year. We can lower our risks by building a diversified, low-cost portfolio of stock and bond market index funds. But it will still have losing years.
  2. Overly consistent returns: Be suspicious of anything that produces regular, positive returns. If the returns exceed more than 7 percent every year, this screams that something might be wrong.
  3. Unregistered investments: Ponzi schemes are investments that aren’t usually registered with the SEC or state regulators. When an investment is registered, it gives investors important information about a company’s management, products, services or finances.
  1. Unlicensed sellers: Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms. But that doesn’t mean a licensed seller can’t offer you a scheme that turns out to be a Ponzi. HSBC and the giant Swiss bank, UBS, both had “feeder funds” that contributed money to Madoff.
  2. Secretive and/or complex strategies: Investors should avoid anything they don’t understand. Complex-sounding strategies that offer consistent, strong returns are major red flags. If you want to see a classic example, check this one out.
  3. Issues with paperwork: Always ensure that you can review your investment information in writing. Be wary of account statement errors and inconsistencies. These might be signs that the money isn’t being invested as promised.
  4. Difficulty receiving payments: If you’re having a tough time cashing in your investment, be suspicious. I once invested in a Ponzi scheme. I recall wanting to withdraw some money. The administrator said, “We can’t get your money right now. But next month might be better.” I told my story here.

If you think an investment opportunity might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or submit a tip online at

The Wizard of Lies: Bernie Madoff and the Death of Trust

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas