Oh but while we're at it, here's some more food for thought from a different source and perspective. Does that sound familiar?
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Bubble and Ponzi Schemes used in Investment Fraud Scams
Its Namesake
Named after Carl Ponzi, who collected $9.8 million from 10,550 people ( including ¾ of the Boston Police Force ) and then paid out $7.8 million in just 8 months in 1920 Boston by offering profits of 50% every 45 days.
A swindle of this nature, referred to as a "bubble" for the hundreds of years it has existed and now referred to as a "Ponzi scheme" is basically an investment fraud where investors are enticed with the promise of extremely high returns or dividends over a very short period of time.
This shorter period between payouts and high rate of return is required to create the impetus for the frenzy that is to follow as word leaks out, and is soon verified, by numerous sources. The truly experienced con will balance these two factors ( payout period and promised rate of return ) against the expected duration of the operation so as to maximize his take while still maintaining some semblance of credibility.
In the true sense of borrowing from Peter to pay Paul, ponzi schemes are a simple fraud whereby initial investors are paid exceptional dividends as interest cheques from the deposits of a growing number of new investors.
"Profits" to investors are not created by the success of the underlying business venture but instead are derived fraudulently from the capital contributions of other investors.
A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in. Usually there is no actual investment involved, contrary to your understanding, just money being shipped in from new investors to the earlier ones.
Ponzi schemes eventually collapse because the underlying asset upon which the investment was based either never existed, or was grossly overvalued. And unlike pyramid schemes, where one's potential gain is measured by the active and conscious practice of participant recruitment, ponzi schemes attribute their moneymaking abilities on some elaborate and inventive investment or business process, with the influx of new depositors the result of word-of-mouth only.
There are several distinctions between Ponzi schemes and pyramid selling schemes. A requirement of a Ponzi scheme is the promotion of what starts out to be, or appears to be, a real investment opportunity which investors may passively contribute to.
The pyramid scheme involves a person making an investment for the right to receive compensation for finding and introducing other participants into the scheme. There is a clear understanding among the participants that the success of the opportunity is dependent upon attracting these additional participants.
Pyramid schemes require active participants who will bring in more participants till reaching a finite end. Ponzi schemes can flourish even with passive investors without any responsibility to promote the opportunity.
The similarities are uncanny but the draw of a ponzi scheme is that while most investors are either too lazy, sophisticated or introverted to consider a multilevel marketing program type of pyramid recruitment, even the most astute investor is drawn to a program which has proven itself to be highly successful over time, where the only requirement is providing funds for investment.
A Fraudulent Technique
It should be emphasized that this type of scheme is the "process" or mechanics of the con rather than a type of investment fraud. Therefore, it can appear as part of other deceptions or contain false investment vehicles which can be used just as easily on their own.
The stated instrument of investment is generally obscure enough to mask it from comparative scrutiny, but really any story will do, as long as payments are regularly made to "earlier investors" to provide credibility. These fortunate few are known as "songbirds" since they sing the praises of the scam to others. Any money paid to investors, described as income or interest, is actually a distribution from the "capital" already received.
The regular payment of so-called dividends induces investors to bring friends, family members, or business colleagues into the scheme and to put up additional funds themselves now that they are convinced of its veracity. The operators will also persuade you, with little effort, to "roll over" your "profits" into another investment cycle, so your actual return ends up being back on paper only.
They may decide to provide you with just "statements" showing you your profits rather than sending out cheques, but the receipt of a cheque in the mail seems to generate more enthusiasm for participants, and it ultimately makes it back to the con at any rate.
This kind of setup relies on keeping his victims from knowing they are being cheated for as long as possible so others can be lured in.
As long as they can convince investors that it is a safe, secure investment which even moderately beats what you are presently getting, you can be convinced to invest. Even if you guarantee a person a 20% return every 90 days on a $10,000 investment, you can pay that person a $2,000 "dividend" cheque out of their own money once every three months for up to 15 months before their money is gone.
That person's eventual shortfall can easily be covered by new deposits, thereby extending the scheme. This, in effect, could actually make money for those early investors that do not reinvest their gains, which is rare. As word spreads of the unique opportunity, money begins to pour in faster than it is going out. Hearing about it, you get hooked by the desire to do what you think you see other people doing around you, making money. Once that rate slows or stops, the con usually closes up shop and disappears.
Because a ponzi scheme is technically insolvent, in the sense that its liabilities exceed its assets from the first day it does business, it can only continue until the pool of gullible new investors dries up. At that point, the scheme collapses or the operator folds it up. The collapse may be accelerated by the promoter's overuse of the money on impressive looking trappings for substantiation, or on personal extravagances, to create the appearance of prosperity.
Many first-time perpetrators of this crime become so accustomed to the lifestyle it generates that they themselves are in disbelief when it crumbles, convinced over time by their own lies.
Ponzi schemes can be applied to almost any business or investment, so when it fails, as it must, people often deem it a poor investment rather than an elaborate hoax. To mask the fraudulent nature of the investment the scammer will often file for bankruptcy after safely hiding the money, then bemoan his failure and offer abject apologies to his loyal followers.
Generally, investors in Ponzi Schemes lose most of their invested moneys because there is no substance whatsoever to the "opportunity". By making a lie look like a truth they cause you to become unwary and abandon your common sense.
Commonly Targeted Victims:
- Clients who have been involved in other, legitimate business activities with
their accountant, financial planner, investment banker, broker, etc.
- Friends, family members, and business associates of targeted victims
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The full article is here:
http://www.crimes-of-persuasion.com/...rson/ponzi.htm
Food For Thought...
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