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Common Investment Frauds

Autor:   •  January 17, 2013  •  Case Study  •  1,450 Words (6 Pages)  •  741 Views

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Common Investment Frauds

Eventually, everyone in this room will start thinking of ways of how to invest your money. You will probably start looking up information on the stock market, bonds, certificate of deposits, retirement programs or speak with a financial advisor about your options and will choose the one that yields the most according to the amount of risk you are willing to take. However, due to today’s economical situation, most assets are yielding very little interest. From the safest to the riskiest investment, you will be lucky if you find anything higher then 5%.

People tend to get very impatient and want the most for their money in the shortest time possible. During a recession, people hold on to their savings just in case of anything. With news of the United States being out of the recession and unemployment dropping, con artists will begin to take advantage. With so many programs and tax breaks to stimulate the economy, con artists go around giving false information to people and commit frauds.

Today, I will be talking about three common investment frauds that we should all be aware of.

The Ponzi scheme

The Ponzi scheme is a scheme that promises high returns that are not available in traditional investments with little or no risk. The money gained from investors is not invested but used to pay existing investors and for personal use. Let me demonstrate with a diagram how it works.

It starts with a schemer. The schemer comes up with some bizarre investment plans and recruits two investors to invest X amount of money promising Xpercentage of return with little or no risk. The schemer uses the money and may invest in a legit asset but it doesn’t earn what the schemer promised. Now when it is time to pay the initial investors, the schemer recruits four more and offers them the same deal as before but with the option of a lower percentage yield. When the second round of investor time is up, the schemer must recruit more investors to pay the existing investors. This pattern continues until many investors want to cash out or the schemer cannot recruit the number of investors necessary.

The Ponzi scheme gained its name from what sources claim to be the creator, Charles Ponzi. In the 1920s, Charles Ponzi went around Boston Mass. promising clients a 50% profit within 45 days or 100% profit within 90 days by buying discounted postal reply coupons in other countries and redeeming them at current value in the US. He schemed failed when the Post, a newspaper, came out with a front-page story about a scandal he was previously involved in and a number of irregularities found in the books of a bank Ponzi owned. Ponzi surrender to the federal authorities and was found guilty of 86 mail frauds.

Recent News: In 2008, Bernard L. Madoff pleaded guilty to 11 federal felonies and admitted operating


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