PONZI SCHEMES

NAVEED PASHA ABBAS MANDVIWALA SAMAN ZULFIQAR

A Ponzi scheme is a fraudulent investment operation that pays

returns to its investors from their own money or the money paid by

subsequent investors, rather than from profit earned by the individual or

organization running the operation.

What is Ponzi Scheme?

•Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S. and Canada.

•Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage.

•In reality, Ponzi was paying early investors using the investments of later investors

How did Ponzi Schemes get their name?

•He duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920.

•Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors' money to make payments to earlier investors and himself.

•Ponzi claimed that he would have money sent to agents abroad, such as in Italy, where they would purchase the coupons.

•Those would then be sent to the United States and redeemed for stamps of higher value. His claimed net profit after costs and expenses, and considering currency exchange rates, was over 400%.  After pulling in millions of dollars, it eventually became apparent that the investment plan was nothing but a fraud

• It was uncovered that, in order to reach the level of investments that were made, 160 million coupons

would have needed to be issued. In reality, only 27,000 had been. Soon afterward, Ponzi was arrested and

indicted. 

1.High investment return with little or no risk

Ponzi scheme provides high return in less or no risk.

What are some Ponzi scheme “red flags”

2. Consistent returns

Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

3. Unregistered investments

Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

4. Unlicensed sellers.

Most Ponzi schemes involve unlicensed individuals.

5. Difficulty receiving payments.

Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

With little or no legitimate earnings, the schemes require a consistent flow of

money from new investors to continue. Ponzi schemes tend to collapse when it

becomes difficult to recruit new investors or when a large number of investors ask to

cash out.

Why do Ponzi Scheme collapse?

The SEC investigates and prosecutes many Ponzi scheme cases each year both to prevent new victims from being harmed and to maximize the recovery of assets to investors.

Does the SEC investigate Ponzi Scheme?

Ponzi Scheme Scammers

ALLEN STANFORD

THOMAS JOSEPH PETTERS

BERNARD MADOFF DOUBLE SHAH

ALLEN STANFORD

On February 17, 2009, the Stanford International Bank and proprietor Allen Stanford were accused of "massive fraud" by U.S. authorities, and SIB's assets were frozen. He is said to be a financier and he used to sponsor the professional sports persons.  The apparent Ponzi scheme drew in more than $8 billion of "deposits", many from investors in Latin America. He was arrested by the Federal Bureau of Investigation on June 14, 2009 and sentenced to 110 years imprisonment on June 14, 2012.

THOMAS JOSEPH PETTERS A businessman from the United States. He served as the chairman of the company called as the Petters Group Worldwide. His company

said that they will be using the investors’ money in the purchasing of electronics items.

His scam was of around 3.65 million US dollars. Currently he is in jail after being

sentenced in April 2010 by the court for 50 years.

BERNARD MADOFF Co-founder and former chairman of the

NASDAQ stock exchange. He ran the biggest Ponzi scheme in the history. He defrauded thousands of investors, he was caught and admitted liabilities of around $50 billion. He is sentenced for 150 years in prison

DOUBLE SHAH A science teacher in a local schooh. He

started his scam from his neighborhood by promising to give 100% return on investment in 15 days. He accumulated around 1 billion US dollars. He was arrested on the charge of robbery.

Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new

participants, instead of actual profits from investing or selling products to the public. Here

are some common differences.

Similarities and Differences between Ponzi and Pyramid schemes?

Pyramid Scheme Ponzi Scheme

Typical “hook”

Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme.

Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.

Payments/profits

Must recruit new distributors to receive payments.

No recruiting necessary to receive payments.

Interaction with original promoter

Sometimes none.  New participants may enter scheme at a different level.

Promoter generally acts directly with all participants.

Pyramid Scheme Ponzi Scheme

Source of payments

From new participants – always disclosed.

From new participants – never disclosed

Collapse Fast.  An exponential increase in the number of participants is required at each level.

May be relatively slow if existing participants reinvest money.

Pyramid Scheme Ponzi Scheme

Other fraudulent technique

Booking of vehicles/ tractors/capital goods has been done in which the public is asked to give certain cash by hand or deposit the same into a bank account, in the name of advance money/booking price for purchase/lease of such capital goods. The fraudsters either do not deliver the vehicle or disappear with the money.

Cheating through post, e-mails, phone calls, SMS is done by offering unexpectedly exciting prices, lucky draws and sweepstake, and false promotions/offers. Such approaches are designed to lure the innocent people to part with their money.

There are real estate schemes/projects.

Relief/charity Scams

Prize winning frauds

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

What Steps can be taken to avoid PONZI SCHEMES?

•Is the seller licensed?

•Is the investment registered?

•How do the risks compare with the potential rewards?

•Do I understand the investment?

•Where can I turn for help?