A thing or two on MONEY SCAMS (PONZI SCHEME) Question: What is a Ponzi Scheme? How Do Ponzi Schemes Work? Answer: A Ponzi scheme is a scam investment designed to separate investors from their money. It is named after Charles Ponzi, who constructed one such scheme at the beginning of the 20th century, though the concept was well known prior to Ponzi. The scheme is designed to convince the public to place their money into a fradulent investment. Once the scam artist feels that enough money has been collected, he disappears - taking all the money with him. For some reason, this guy you just met at a party has suddenly taken a liking to you. To him, you seem sharp and able to recognize a gold mine when you see it. He only offers this tip to his closest friends, but hes willing to make an exception for you. He says if you get in on this opportunity now, youll be an early investor in the next big thing. Not only that, its fail-safe and will return your investment in no time. If youre skeptical, why not ask your friends at the party -- they invested last month and have already seen returns. You do ask them, and its true. So why not hand over a few thousand dollars before its too late? Despite what your trustworthy friends say, its better to walk away. This guy is probably selling a Ponzi scheme. Unfortunately, not all financial schemes look the same, which makes it hard to spot one when youre victimized. In true Darwinian style, clever scammers are able to thrive by consistently adapting and evolving their schemes to come up with new ways to con others out of their life savings. The Ponzi scheme is just one type of con. And, although its based on a classic formula, the idea can be applied in countless ways to deceive unsuspecting victims. Ponzi schemes pop up frequently, though not all of them are big enough to make headlines. But every few years, a news story comes out telling how authorities have exposed an extensive and long-running Ponzi scheme. Two such exposed schemes (one that broke in 2006 and the other in 2008) were each reportedly bigger than any before them. Bernard Madoff, who orchestrated the most massive Ponzi scheme to date, conned about $65 billion from investors who came from all walks of life. Why is the scheme so effective? And how is it that your victimized friends in the earlier example actually did make some money? Well examine the formula behind a Ponzi scheme as well as the recent instances that have popped up in the news. Five Key Elements of a Ponzi Scheme The Benefit: A promise that the investment will achieve an above normal rate of return. The rate of return is often specified. The promised rate of return has to be high enough to be worthwhile to the investor but not so high as to be unbelievable. The Setup: A relatively plausible explanation of how the investment can achieve these above normal rates of return. One often-used explanation is that the investor is skilled and/or has some inside information. Another possible explanation is that the investor has access to an investment opportunity not otherwise available to the general public. Initial Credibility: The person running the scheme needs to be believable enough to convince the initial investors to leave their money with him. Initial Investors Paid Off: For at least a few periods the investors need to make at least the promised rate of return - if not better. Communicated Successes: Other investors need to hear about the payoffs, such that their numbers grow exponentially. At the very least more money needs to be coming in than is being paid back to investors. Steps in the Ponzi Scheme Ponzi Schemes are quite basic but can be extraordinarily powerful. The steps are as follows: Convince a few investors to place money into the investment. After the specified time return the investment money to the investors plus the specified interest rate or return. Pointing to the historical success of the investment, convince more investors to place their money into the system. Typically the vast majority of the earlier investors will return. Why would they not? The system has been providing them with great benefits. Repeat steps 1 through 3 a number of times. During step 2 at 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.... #I_should_have_studied_journalsm :-)
Posted on: Mon, 31 Mar 2014 16:12:39 +0000
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