Few investors don't know what a Ponzi scheme is. After Bernie Madoff soaked investors for billions, it was hard not to.

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Opinion

Few investors don't know what a Ponzi scheme is. After Bernie Madoff soaked investors for billions, it was hard not to.

The former chairman of NASDAQ carried on the charade for decades, first taking from friends and family and then expanding. And like all Ponzi schemes, it continued so long as existing investors could be paid returns with the injection of capital from new ones. But when investors wanted their money back in the midst of the 2008/2009 meltdown, the scheme collapsed.

One of the best ways to avoid investment fraud is to deal only with registered advisers and brokers.

RICK NEASE / MCT

One of the best ways to avoid investment fraud is to deal only with registered advisers and brokers.

Despite awareness, Ponzi schemes -- and other fraud -- are alive and well. Take the recent court case in Calgary, where two men bilked investors of $200 million in a Ponzi scheme that purportedly invested in a Honduran resource venture. Like most investment fraud, it went on for years before being uncovered.

March is Fraud Prevention Month, and while most of us worry about our identity being stolen or bank account being raided by organized criminals, we're equally at risk of being led down a seemingly gilded road to riches only to find out that glittering investment is junk.

No one can say for certain the depth of investment fraud in Canada. We don't keep good statistics, according to a recent report by FAIR (the Canadian Foundation for Advancement of Investor Rights).

Yet Pat McParland -- one of Canada's top forensic accountants -- says he's been increasingly busy.

"I see an awful lot of it, and I've been involved in quite a few investment-fraud cases in the last few years; more than I ever have before," says the senior manager of investigative and forensic service with MNP in Vancouver.

He's been at it for almost 30 years. And indeed, most of the investment-fraud cases he investigates are Ponzi schemes.

"Oftentimes, when people start out with the scheme earning 12 per cent, they assume the proof is in the pudding and think 'I better tell my brother, my friends,' " he says. "That's how it spreads."

Getting restitution is difficult. The money gets comingled with other investors' funds. It is just as likely to be long gone, spent by investors or criminals on lavish lifestyles.

While even sophisticated investors do get ensnared (Madoff's firm produced a fairly convincing paper trail), generally, a lack of financial literacy is involved.

That's why -- enforcement efforts aside -- regulators spend considerable effort on financial-literacy initiatives.

"When people become financially educated, they make informed decisions and don't encounter the same pitfalls we often see with people who do run into trouble," says Ainsley Cunningham, the Manitoba Securities Commission (MSC) manager of education and the co-chairwoman for the Manitoba Financial Literacy Forum.

One of the best ways to avoid investment fraud is relatively simple: Deal only with registered advisers and brokers.

"I see no positives at all with someone who isn't registered," says Jason Roy, a senior investigator with the MSC.

Registered "investment advisers" are industry professionals licensed to sell mutual funds or stocks and bonds. They also might have a professional designation, such as certified financial planner (CFP).

But just how do you know someone is registered? For one, you can ask them, or, even better, check online using the site run by the Canadian Securities Administrators (CSA), aretheyregistered.ca.

Another indication they're licensed is they sell the typical array of investments: stocks sold on exchanges, well-known government and corporate bonds, mutual funds, etc; whereas the unlicensed dealers are selling investments that aren't listed anywhere.

That doesn't mean these investments are fraudulent or aren't potentially lucrative, but you should ask yourself: "If the investment is as good as suggested, why am I being offered the deal?"

In the investment world, the little guy is always the last to the party. So when you're all of a sudden at the front of the line, you should certainly be suspicious.

Good investors are always skeptical of investments offering high returns for seemingly low risk.

People who invest well are patient -- though good luck doesn't hurt either. More than anything, success involves homework... lots of it. And today, there's more information at your disposal than ever before from Fund Facts, a page of key information about mutual funds, to the business section in the newspaper to blogs to free sites -- such as Google Finance -- listing real-time data on publicly traded stocks.

"Knowledge provides the lens to assess financial opportunities enabling consumers to spot outright fraud, but also financial knowledge helps focus on either the 'too good to be true' elements of financial offerings or the 'not in my best interest' personal reality," says Sally Massey-Wiebe, a financial counsellor with Community Financial Counselling Services.

Massey-Wiebe has certainly seen the negative consequences of poor financial literacy. The Winnipeg non-profit helps individuals facing difficult debt challenges. They may not have fallen for investment fraud, but the basis for their missteps is the same -- grabbing onto an enticing proposition without fully considering the consequences.

"It's not always that people are uninformed and couldn't understand -- sometimes it is a deliberate blind eye and not bothering to delve into the details because their focus was on the short term 'having what I want now' versus the long-term reality that they are committing their future, sometimes uncertain, income."

Massey-Wiebe says the earlier people start learning lessons about finance the better -- and that goes for children. That's why CFCS and other organizations, including BMO, are behind TWOKAM (Talk With Our Kids About Money) Day on April 15.

And just because you might be a bad manager of money yourself doesn't mean you -- as a parent -- can't impart wisdom.

"We don't need to be money experts or have done everything perfectly in order to talk with our kids about money," she says. "We often learn best from our mistakes, and as parents, we might have made some financial choices that we would not want to repeat."

Nor would we want our kids to repeat our missteps either.