“People
often compare a Ponzi scheme to building a house of cards. It must collapse
eventually. “
Charles Ponzi was an early
20th century Italian immigrant to the United States. Ponzi invited people to
invest in International Postal Reply Coupons. He promised extremely high
returns. All he really did was take investors' money and deal out small
payments to earlier investors. All told, Ponzi cheated his victims of $10
million
How Ponzi
Scheme Works?
For some reason, guy you just met at a party has suddenly taken
a liking to you.. He says if you get in on this opportunity now, you'll be an
early investor in the next big thing. Not only that, it's fail-safe and will
return your investment in no time. “If you're skeptical, why not ask your
friends at the party -- they invested last month and have already seen returns”.
You do ask them, and it's true. So
why not hand over a few thousand dollars before it's too late? This
guy is probably selling a Ponzi scheme. Despite what your trustworthy friends
say, it's better to walk away..
Features of
Ponzi Schemes :-
High Rates of
Return
All investors wish
to receive the best rate of return possible in the market place. Thet
also used the media to convince the
investor public that not only is the rate of return extremely high, but the
investment is extremely safe. For the investor, the investment is
simple. All they have to do is hand over their money. No where in
any of the documentation or any of the publicity or in any of the marketing
surrounding the investment scheme is there any mention of the word
“risk”. The whole concept that the high the return, the higher must be
the risk is very well disguised.
The scheme revolves around the process of
paying old investors with the money you get from new investors.
It is
important to send a message to the investor public that not only is the yield
high, but the return is secure. In order to do this, significant returns
either by way of dividend or interest are paid to the initial investors.
The initial investors of course then tell all of their friends and family about
how attractive the investment opportunity is. This has the effect of
sending a message of high confidence to their friends and associates and
networks, enabling and encouraging particularly more investors to come into the
scheme.
Based on the Blind Trust
Ponzi Schemes are based on
the blind Trust you place on the person who is convincing you to enter into the
scheme. He may be your best friend, close relative or the chairman of well
established body.
Behaviour of the person contacting you
The person who contact you will be witty, charming, pleasant,
modest and gentle in your dealings with your targets. These
persons me be seen in the local newspapers.They look very prosperous.
Network Marketing
It is not uncommon
to see a disproportionate number of teachers or policemen or nurses within a
particular group of investors. This is consistent with the points above,
that is to say because the initial investors in the scheme seem to be receiving
a good return and they tend to spread the word amongst their networks and
groups. Little do they know that they are really setting up their friends
and families and associates to a major disaster.
Seminars to play with emotions
The presenter is
extremely experienced at playing to an audience. The message is extremely
polished and manages to play on the emotions of the audience. The presenters
are expert at plugging in to the needs of the investors.
The scheme presenter will plug in to other emotions for example,
Envy - Everybody else is making this money, why don’t you?
Urgency - Whilst ever you sit back and do nothing, other people are doing well?
Charity - How are you going to help your children buy their first home?
Security - Have you got enough to retire on in your old age?
Financial Freedom - Don’t you just hate your Boss ?, be your own boss.
The presenter
manages to convince the audience that all of the above problems can be solved
simply by putting your money into the investment scheme. It is so simple
and foolproof. Again the concept of risk is never discussed.
No Knowledge and Control of Investor on Underlying Investments
Principally, the
underlying investment, that is the properties that the investors believe that
they are funding are often in a completely different geographical location to
where the investors reside. This of course prevents the investors from
having a very close look at the progress of their investment. The Investor
has no real idea of the legal ownership of the underlying assets
Unclear Documentation
It is extremely common for
the investors to have no real idea of the nature of their investment.
Sometimes the investment is referred to as shares, other times it is referred
to as units, sometimes the investors believe they have security or equity in
the underlying properties but on investigation and review, the investors are
shown to be clearly nothing more than unsecured creditors in some entity.
The investor may have relied on various advertising literature, or
representations made by the company representative, or representations made by
his friends and associates, or information he may have received at a
promotional seminar. Usually the investor simply signs some form which is
often changed and amended from time to time depending on the circumstances.
It is also very
rare for the promoters of these schemes to provide any information or meet with
solicitors or accountants or other advisers to the investors.
When the company ultimately collapses, and the investor is invited to a
creditor’s meeting, it can even be difficult to ascertain which entity within
complex groups the investor in fact has a claim.
Substantial Fees taken by the Promoters
Another curious
observation in relation to these schemes is that the promoters of these schemes
seem to be able to persuade the investors to pay them substantial fees for the
privilege to put their money into the schemes.
How
to Smell a Ponzi Scheme ?
Crowd rush in : Don't let anyone pressure you into an
investment. If you feel you're being pressured, that's all the more reason to
suspect that something's awry. Take your time in making your investment
decisions.
Red Falgs :-
-
Unrealistic
returns: Investigate it as much as you can before
you fork over any funds.
-
Use
of the word “Trust Me” , “ Act Now”
-
Big promises
Devil is in the details: If
you do enter an investment, carefully examine what information the company
provides. A suspicious lack of details should be a red flag. Don't rush
to invest after receiving a single phone call, attending a single seminar, or
meeting with the salesperson a single time. However exciting the prospect may
be, do not "act now".
Diversification
: So how can you protect yourself from the super smart
shysters? The best protection is diversification. Overall, it shouldn't be the
end of the world if you do happen to be the victim of a Ponzi scheme. Invest
in multiple places and in different industries. No one investment should
account for more than a 25% of your whole portfolio
Take some
Time :
Don't judge a book by its cover. Salespeople are trained to be professional and charismatic.
Consultancy : Scams
succeed mostly with people who have little investment experience or knowledge.
Consult a professional financial adviser. Consult your friends and family. Don't sign anything you don't understand. Have
a lawyer review any contracts you are asked to sign.
License/ Registration
: Do not invest without checking of your
own to see whether the broker or the company you are dealing is registered with
the regulator e.g insurance regulatory, SEBI, Reserve bank of India etc
Taxes: Steer clear of opportunities that claim to be
tax-free investments. Investment returns, like all legitimate ways to make
money, are subject to taxes.
Cheque Payment : When you
make an investment, make
the account payee check payable to
a company, never an individual salesperson. Take the Receipt from the
salesperson.
Investment Seminars : Seminars are intended to sell the products. if
you attend the seminar don’t buy anything there neither you should give your
personal details there.
Check your Report : After making an investment, examine your investment reports and
make sure no unauthorized transactions are being conducted.
Put
Everything in Writing:- Your
conversation and promises of the broker/ company should be put in writing and
signed.
Report
to the Regulators : If you are the victim of a scam, the best thing you can do is
report it. Scammers depend on
your uncertainty and embarrassment at being swindled to keep the scam
going. Don't be embarrassed -- even the best get taken.
nt-weight:normal'>Report
to the Regulators : If you are the victim of a scam, the best thing you can do is
report it. Scammers depend on
your uncertainty and embarrassment at being swindled to keep
the scam going. Don't be embarrassed -- even the best get taken. I
No comments:
Post a Comment