Chortle all you like about the high-society types in Manhattan and Palm Beach taken in by Bernard L. Madoff's supposedly steady 12% yearly return in good times and bad. Assets entrusted to him reached $65 billion (including phony profits reinvested) before he confessed and was packed off to prison for 150 years. But aside from the extra zeros, Madoff's fraud was hardly unique nor was his customers' suspension of skepticism.

Want proof? Journey with us to the remote desert known as New Mexico. The self-proclaimed Land of Enchantment is wrestling with the February exposure of what authorities say is a homegrown Madoff. In a poor, thinly populated state, Albuquerque real estate operator Douglas F. Vaughan had managed since 1993 to collect $86 million from 600 investors. That money is largely gone. In a civil fraud lawsuit the Securities & Exchange Commission alleges Vaughan, like Madoff, paid earlier investors with funds from newer investors rather than from profits--the classic definition of a Ponzi scheme.

Vaughan and his main business have filed for bankruptcy; assets have been ordered frozen. Bankruptcy Judge James S. Starzynski ruled in May that Vaughan ran "a Ponzi scheme of considerable magnitude and sophistication for many years." As in the Madoff case, investors who received payouts from Vaughan in recent years may face efforts by the bankruptcy trustee to claw back the money. A state criminal probe is under way; investigators brandishing search warrants have raided various locations.

Vaughan, 62, has largely stayed mum, often invoking his Fifth Amendment right against self-incrimination when officially questioned and declining to speak to FORBES. He has not yet formally answered the SEC suit. But last month he denied to Albuquerque TV station KOB that he had been running a Ponzi. "We never had that intent," he said, adding investors included "some of our very, very best friends, family members."

However the government investigations turn out, it's already clear that the mistakes Vaughan's investors made mirror those made by Madoff's victims. Here are some hard lessons.

Don't Rely on Reputation. A New Mexican since childhood and an accountant by education, Vaughan owned Vaughan Company Realtors, one of the state's largest real estate brokerages, with 150 agents in five offices. Its for-sale signs were everywhere. Vaughan himself was, in the words of Judge Starzynski, a "well-known, well-liked and apparently very successful Albuquerque businessman." He wore expensive jewelry and had a 5,300-square-foot mansion in a nice Albuquerque neighborhood. Several investors tell FORBES they relied mainly on what seemed to be Vaughan's good reputation--he was once Albuquerque's Realtor of the Year--without inquiring further.

Don't Be Greedy. Vaughan sold primarily three-year promissory notes (and later partnership interests) with fixed returns averaging 17.5%. That was far higher even than the return offered by Madoff or by Allan Stanford, the jailed Texas-born financier now facing criminal charges for allegedly running an $8 billion Ponzi out of the Caribbean. According to court filings, Vaughan sometimes offered returns as high as 25%; one investor has told investigators of a 40% pitch. Such interest levels were many times the going rate for a minimal-risk investment and thus a giant red flag. Vaughan told investors he was making real estate investments and issuing high-return notes because he distrusted banks.

Be Wary of Returns That Are Both High and Steady. Year in and year out, as investors rolled over their investments for another period, Vaughan offered the same high rate--or even higher. In the early 2000s Vaughan raised his rates even as interest rates nationally fell sharply, says William F. Davis, a lawyer representing creditors in the bankruptcy.

Demand Disclosures. Albuquerque financial advisor Rob Burpo reports Vaughan pitched him personally and unsuccessfully in 2005 with a note paying 25% but had little paperwork describing the deal or the collateral. "It was pretty questionable," Burpo says. Vaughan routinely signed personal guarantees and pledged real estate as collateral. However, it now appears he used the same collateral--a motley collection of small rental town houses and his own residence--over and over. Vaughan's $3.25 million home, for example, now has $79 million in mortgages against it.

Investors also complain they did not receive regular, comprehensive financial statements. The SEC lawsuit says Vaughan's business had a negative $25 million cash flow in 2008 and 2009. His own corporate tax returns showed increasing net operating losses every year since 1994.

Don't Depend on Regulators. Under New Mexico law the promissory notes were required to be registered as securities, which would have mandated all kinds of disclosure. Vaughan's were not registered; twice in the 1990s he filed forms claiming he was exempt because he had fewer than 25 investors. But at least New Mexico securities regulators, who broke the case, didn't ignore a decade of tips, as the SEC did about Madoff. After getting wind of Vaughan's activities last fall, they quickly had an undercover agent posing as a potential investor contact him--with a tape recorder running.

Stay Diversified. Many Vaughan investors sold their small businesses, retired and then invested their entire nest eggs with Vaughan. "A lot of people put in all of their money," sighs Terry White, president of a trust company holding a number of self-directed individual retirement accounts that have filed bankruptcy court claims against Vaughan. A promised high return should have been a reason to increase--not reduce--diversification into other investments.

Watch out for Paid Shills. Some investors say they attended what were billed as generic retirement-planning sessions that turned out to be promotional events for Vaughan. Investigators, including some from the SEC, are probing whether Vaughan paid hidden commissions.

Some 100 of the investors are from outside New Mexico. They include Janice Dorn of Phoenix, whose website calls her a "financial psychiatrist and financial futurist." Her claim is for $485,000. Overall, however, Vaughan's investors, unlike Madoff's, do not seem to include the financial elite or even regionally prominent individuals. One exception is Bob L. Turner, a 77-year-old Ford dealer well known in Albuquerque for long-running tv and radio ads proclaiming "no bull." He lent $4.4 million to Vaughan, whom he called a close friend.

While the Vaughan case size clearly looks like a record for New Mexico (pop. 2 million), the state sees a Ponzi case or two nearly every year. New Mexico's Indiana-born Governor Lew Wallace wrote in 1881 after publishing his epic biblical novel, Ben-Hur, "All calculations based on our experiences elsewhere fail in New Mexico." It's now a locally famous commentary regularly invoked to explain all kinds of disappointments.

True, New Mexico has a distinctive character--its most famous historical figure is the 19th-century killer Billy the Kid. But when it comes to gullibility, New Mexicans proved to be no different from the swells in New York and Florida. They lost less only because they had less wealth to lose.