A “Ponzi Scheme” is an investment fraud that involves the payment of alleged returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often seek new investors by showing potential in their company; they entice investors to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legal investment activity.
The system is destined to collapse because the earnings are less than the payments to investors. Ponzi schemes tend to collapse when it ...view middle of the document...
Dazzling presentations and impressive discussion will be used by the frauds to charm the investors to make a huge investment in the company. The fraud will then sell stakes of the company to the investor and promise him or her their return on investment in double the proportion that they have invested, something like 20 percent on a 30-day contract. The promoter will ask the investors to keep the talks about the investment secret telling them that it will create a competitive edge in the market.
The promoter will then try to gain some more small investors and try to entice them as well giving them the charming presentation but as the investments are not that popular yet, the promoter finds less investors. But whatever initial small they find, thirty days later, the big investor receives the original capital plus the 20 percent return. At this point, the investor will have more incentive to put in additional money and, as word begins to spread; other investors grab the opportunity to participate, which in effect derives the promise of extraordinary returns. However, the return to the initial investors is being paid out of the investments of new entrants, and not out of profits.
Reason that the scheme firstly works so well is that early investors, those who actually got paid the large returns, commonly reinvest their money in the. Thus, the promoters of the scheme do not actually have to pay out very much. The promoter sends statements to investors showing them how much they earned by keeping the money, maintaining the illusion that the scheme is a fund with high returns.
Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, in exchange for higher returns. If a few investors do wish to withdraw their money in accordance with the terms allowed, the requests are usually promptly processed, which gives the illusion to all other investors that the fund is on track.
Eventually at some point conditions arrive where the scheme is at stake or being revealed. So ways that such schemes get exposed are, first, the promoter will vanish, taking all the remaining investment money with him or her. Second, the scheme will begin to collapse under its own weight as the investment slows and the promoter starts having problems paying the promised returns, the higher the return on investment the greater is the risk of the Ponzi scheme collapsing. Such crises often trigger panics, as more people start asking for their money. Third, the external market forces, such as a sharp decline in the economy, may cause many investors to withdraw part or all of their funds; not necessarily due to loss of confidence in the investment, but simply due to the market meltdown.
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. During 2009, the SEC filed 60 enforcement actions...