Ponzi scheme is named after Charles Ponzi, who in earlier 1920 offered investors a choice to between 50% return on 45 days investment and 100% return on 90 days investment due to an arbitrage in the pricing of international reply coupons, claiming that the high profits were the result of his unique understanding to the international postal reply coupon system (Branscum, 2002).
A Ponzi scheme is a fraudulent investment management service, ran and controlled by a central operator who will pay promised profits to the earlier investors using the capital of new investors joining the scheme. The operators of Ponzi scheme promises the original investors abnormally high or fast returns, often suggesting that they use a unique strategy or investment mechanism. They repay the original investors with later investment creating an illusion that they have fulfilled their promise of rapid success which attracts new investors (Johnston, Johnson, & Hummal, 2010). The elements of Ponzi element as given by Wlkins, Acuff and Hermanson, (2012) are investor deposits, little or nO legitimate business operatios,little or nO business earnings or profiTs and the source of return to investors is cash received from new investors.
It is structured as a pyramid wherein more money is needed in each round to make payment to existing investors. For example: If a Ponzi Scheme Operator approaches an investor for one year investment with 50% return. The investors invest Rs.100,000 in the scheme with the hope to get Rs.150,000 at the end of one year. At the end of the year, the Ponzi operator approaches other investors with the same scheme and pay the promised amount to the first investor with the amount collected from new investors. The fund requirement will increase geometrically over time resulting in the collapse of the scheme as the operator become unable to recruit new investor to fund original investor’s payment return resulting in the loss of investment of later investors (Jory & Perry).
The originators should have financial obligation to the investors whether they are savvy or not. Technically and morally, the investors should get their money back but the rules of the country regarding such fraudulent act decides how much amount will be refunded to them. It is equally important to note that no scheme originator have ever returned the total investment amount.
The Ponzi scheme are generally operated unregistered as it is illegal. The victims of the scheme may seek advice of a financial planner or adviser and lawsuit can be filed against the perpetrator but it is rare that the financial obligations are limited to the perpetrator only. The investors in such schemes are also equally guilty as the originator as they are unknowingly contributing in the illegal act. However upon discovering the fraud, the operators of Ponzi Scheme are taken legal actions. Bernard L. Madoff being sentenced for 150 years of imprisonment in 2009 upon loss of $50 billion of the investors from his Ponzi scheme proves that there is legal recourse for the originators. However, the investors did not get their money back in this case.
References
Branscum, B. E. (2002). Ponzi v. Pyramid; A comparison. Retrieved from Crimes of Persuasion: An Investigator’s Resource: fraudsandscams.com/ponzipyramid.htm
Johnston, K. C., Johnson, K. M., & Hummal, J. A. (2010). Ponzi Schemes and Ligitation Risks: What Every Financing Company Should Know.
Jory, S. R., & Perry, M. J. (n.d.). Ponzi Schemes: A Critical Analysis. Journal of Financial Planning .
Wlkins, A. M., Acuff, W. W., & Hermanson, D. R. (2012). Understanding a Ponzi Scheme: Victims’ Perspectives. Journal of Forensic & Investigative Accounting, 4 (1), 1-19.
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Ponzi scheme is named after Charles Ponzi, who in earlier 1920 offered investors a choice to between 50% return on 45 days investment and 100% return on 90 days investment due to an arbitrage in the pricing of international reply coupons, claiming that the high profits were the result of his unique understanding to the international postal reply coupon system (Branscum, 2002).
A Ponzi scheme is a fraudulent investment management service, ran and controlled by a central operator who will pay promised profits to the earlier investors using the capital of new investors joining the scheme. The operators of Ponzi scheme promises the original investors abnormally high or fast returns, often suggesting that they use a unique strategy or investment mechanism. They repay the original investors with later investment creating an illusion that they have fulfilled their promise of rapid success which attracts new investors (Johnston, Johnson, & Hummal, 2010). The elements of Ponzi element as given by Wlkins, Acuff and Hermanson, (2012) are investor deposits, little or nO legitimate business operatios,little or nO business earnings or profiTs and the source of return to investors is cash received from new investors.
It is structured as a pyramid wherein more money is needed in each round to make payment to existing investors. For example: If a Ponzi Scheme Operator approaches an investor for one year investment with 50% return. The investors invest Rs.100,000 in the scheme with the hope to get Rs.150,000 at the end of one year. At the end of the year, the Ponzi operator approaches other investors with the same scheme and pay the promised amount to the first investor with the amount collected from new investors. The fund requirement will increase geometrically over time resulting in the collapse of the scheme as the operator become unable to recruit new investor to fund original investor’s payment return resulting in the loss of investment of later investors (Jory & Perry).
The originators should have financial obligation to the investors whether they are savvy or not. Technically and morally, the investors should get their money back but the rules of the country regarding such fraudulent act decides how much amount will be refunded to them. It is equally important to note that no scheme originator have ever returned the total investment amount.
The Ponzi scheme are generally operated unregistered as it is illegal. The victims of the scheme may seek advice of a financial planner or adviser and lawsuit can be filed against the perpetrator but it is rare that the financial obligations are limited to the perpetrator only. The investors in such schemes are also equally guilty as the originator as they are unknowingly contributing in the illegal act. However upon discovering the fraud, the operators of Ponzi Scheme are taken legal actions. Bernard L. Madoff being sentenced for 150 years of imprisonment in 2009 upon loss of $50 billion of the investors from his Ponzi scheme proves that there is legal recourse for the originators. However, the investors did not get their money back in this case.
References
Branscum, B. E. (2002). Ponzi v. Pyramid; A comparison. Retrieved from Crimes of Persuasion: An Investigator’s Resource: fraudsandscams.com/ponzipyramid.htm
Johnston, K. C., Johnson, K. M., & Hummal, J. A. (2010). Ponzi Schemes and Ligitation Risks: What Every Financing Company Should Know.
Jory, S. R., & Perry, M. J. (n.d.). Ponzi Schemes: A Critical Analysis. Journal of Financial Planning .
Wlkins, A. M., Acuff, W. W., & Hermanson, D. R. (2012). Understanding a Ponzi Scheme: Victims’ Perspectives. Journal of Forensic & Investigative Accounting, 4 (1), 1-19.