Financial Analysis Megatrends Travel Around Asia on AirAsia. Now Everyone Can Invest.

AirAsia Hotel Rooms Holiday Promotion 2012 Search Box Earn 50 Percent or 48 USD Per Introduction

Search This Blog

Wednesday, May 18, 2011

Meaning of Ponzi Scheme

Named after Charles Ponzi -- who didn’t invent it, but made notorious use of it in the 1920s -- the Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Schemes like this demand a constant flow of money in order to keep going. If the fraudster can’t recruit sufficient new investors, or if a large number of current investors want to cash out, the entire system collapses -- just as it did for Bernie Madoff on December 10, 2008 when his sons told authorities that their father had confessed that the asset-management arm of his firm was “one big lie.” Total loss to investors: $18 billion.

The Hook: Ponzi-scheme organizers ensnare new investors by promising to invest their funds in high-return, low-/no-risk opportunities. Unlike a pyramid scheme, investors don’t have to help bring in new recruits to get paid. And when they make money, they naively assume it’s from successful investments (since the source is never actually disclosed) when in reality, compensation comes from the newer recruits.

Red Flags: The US Securities and Exchange Commission (SEC) suggests looking out for other warning signs in addition to “high-return, no-risk opportunities” which include overly consistent returns, unregistered investments, unlicensed sellers, secretive and/or complex strategies, issues with paperwork (such as excuses as to why you can’t see something in writing), and difficulty receiving payment.

In the Madoff case, however, many sophisticated investors were duped by the fraudster despite his complicated (in fact, fictional) strategies and secretive manner. Madoff’s “play” was largely based on specific sorts of psychological manipulation, say some experts, which allowed him to gain investors’ trust and thwart would-be efforts to verify his outrageous claims.

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...

Compare Reviews