What is a Ponzi Scheme?

O Learn & Keep 16 The Economic Times Wealth, November 26-December 2, 2012 What is a Ponzi scheme? Who was Ponzi? Such schemes are named The scheme is designed to convince people into placing money in a fraudulent investment by promising outrageous or consistent returns. Once the scamster has collected enough money, he disappears. after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme in the 1920s. At a time when the annual interest rate for bank accounts was 5%, he promised a 50% return in 90 days. Ponzi bought a small number of international mail coupons in support of his scheme, but quickly switched to incoming funds to pay earlier investors. How does it work? THE SCHEMER In the first month, the schemer FIRST ROUND takes 100 each from the first TWO INVESTORS two investors. O Since the fraudster has pocketed 200, he needs to get 7400 (four investors) in the second month to pay the returns promised. SECOND ROUND FOUR INVESTORS In the third month, he owes 7800, so he has to find eight new investors. He will have to get more than 100 from each if he wants to keep skimming the money. THIRD ROUND EIGHT INVESTORS 4 In the next month, he will need 16 FOURTH ROUND 16 INVESTORS investors, and so on. A By the 10th round, he will need to find a new group of 1,024 investors. By the 18th round, he would have to come up with over a quarter of a million investors. Source: US SEC, THE NEW YORK TIMES Graphics: CHANDER The trick to trap investors Spotting a Ponzi Scheme Step 2 Such investments, especially those seeking high returns, tend to go up and down over time. Be suspicious of an investment that continues to Avoid the investments After the specified time, return the money to investors that you don't understand or for generate regular, positive returns regardless of the market conditions. which you can't get complete information. Step1 Convince a few along with the specified interest rate or return. TREE people to invest money in the plan. Secretive and/or complex strategies Overly consistent Recent Ponzi schemes have used odd investment options to lure people into parting with their returns Look High investment GOAT The schemer trap Issues with for these warning signs returns with little or paperwork no risk. Unregistered investments Difficulty in receiving payments EMU Every investment carries a degree of risk, and investments yielding higher returns typically involve more risk. Be Ignore excuses money. about the Step 4 inavailability of information on an Step 3 Repeat steps 1 to 3 a number of times. During step 2, in one of the cycles, break the pattern. Instead of returning the investment money and paying the promised return, escape with the money and start a new life. investment in Pointing to the historical success of the investment, cautious about any "guaranteed' investment opportunity. writing. Read the prospectus or BIOFUELS LIKE disclosure Be suspicious if you don't statement before receive a payment or have difficulty cashing out your investment. Ponzi scheme promoters encourage participants to 'roll over' promised payments by offering higher returns. JATROPHA Ponzi schemes convince more investing. Account statement errors typically involve investors to place their money in the system. Typically, the vast majority of earlier investors return. investments that may be a sign that funds are not have not been registered with the regulators. being invested as promised. CACTUS THE ECONOMIC TIMES wealth