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.

Simon James Bangkok Stocks Boiler Room Scam Busted

Twenty foreigners were arrested at their Bangkok office for running a 'boiler room' scam in a joint operation involving the Thai police and international law enforcement agencies -- Australian and Canadian police in conjunction with the United States Federal Bureau of Investigation (FBI).

Thailand's Tourist Police Division Commander Pol Maj Gen Adis Ngamjitsuksri led the international law enforcement agencies to search an office on the 18th floor of the Amarin Tower on Ploenchit Road after receiving complaints from a large number of investors, especially Australians, who had been solicited by telephone salespersons based at a so-called "call centre" in Thailand to buy shares in overseas markets, particularly in Thailand and Hong Kong. They were also persuaded to invest in the gold futures market in Asian markets.

Thai police investigated and tracked down the telephone lines used by the suspects and located their office.

After the raid, 20 foreigners including Americans, Australians, Britons, Canadians, and Filipinos now working in the scam were arrested. The police found scripts for telephone conversations to use to persuade the victims, along with more than 20 mobile phones and fixed-line office telephones.

    
Moreover, lists of victims and their telephone numbers were found, mostly New Zealanders and Australians.

Initial investigation found that the office was rented on January 20 without obtaining permission to establish a company in Thailand.

It is believed that the operation had defrauded victims of more than Bt100 million.

The top executive in the operation was identified as Simon James, a Briton. He will initially be charged with working in Thailand without a work permit. The Thai authorities will coordinate with Interpol to check the background of all suspects and also the names on the list found to determine whether they were victims of the syndicate or not.

How to spot one and be out of it by these tell-tale signs:

1. It’s a cold call. If you haven’t done business with the company before be very, very wary. Why are they calling you? How did they get your number? (Remember that you could also be contacted by email or post.)

2. The firm has an impressive sounding name. If you have never heard of the company before, regardless of how legitimate they sound, stay on your guard. Most fraudsters will use a professional sounding name and convincing website to look trustworthy - some even steal reputable names and masquerade as existing companies. They will also try to impress you with technical jargon and fancy sounding job titles. 

3. The firm is based overseas. It is illegal for a UK-based company to cold-call someone and try to sell them shares so companies are usually based abroad. Many however will have a UK listed telephone number to look as though they are based in Britain.

4. You are promised astronomical returns. But the salesperson doesn’t explain how these great returns will be produced or why they can offer such high returns in comparison to other similar schemes. They may also try to tempt you with a ‘free gift’ or ‘discount’.

5. They claim to have ‘inside knowledge’. But they won’t tell you what it is or how they got it. What’s more, if they have found out inside secrets ask yourself why are they sharing them with you?

6. You’re told you can’t lose. Any investment involves an element of risk, so not only is this categorically untrue, but a legitimate company would never make this type of promise and most will point out all the risks to you clearly before you invest.

7. You have to buy there and then. The last thing a fraudster wants is for you to ‘go away and think about’ their offer. They therefore use high-pressure sale tactics to make you agree on the spot. If you feel under pressure to make a quick decision alarm bells should start ringing.

8. You’re asked to keep the call confidential. If it is a scam the fraudster certainly won’t want you to broadcast it to all and sundry as they could get caught out. Legitimate companies on the other hand would likely be happy for you to discuss the details with others and ask for advice.

9. You’re asked to pay upfront. Watch out for people who request an ‘advanced fee’ as a form of ‘security’ when you speak to them. Until you are sure the deal is legitimate and have given it some thought you should not be handing over any money.

10. They ask for your bank details. A reputable company would never ask for your bank details, or indeed any personal details, over the phone.