PONZI SCHEMES –

AN OVERVIEW

By CA Piyush Akkarbote
 HOW IT STARTS
When you find Some one really unknown to you, coming close and
offering you the very secret of his Investment multiplying Magic
Card, that he/she generally shares with no one. But extending this
opportunity to you just for no reason or just for the reason that
he/she feels that you are one with the super normal ability to sense
the opportunity.

Then he/she throws the biggest trap, “The Returns”. The returns on
this schemes are extra ordinary, super normal and super attractive.
This is the time when one needs to stay awake, you might be about
to enter into a fraud investment pooling scheme.

Unfortunately, not all financial schemes look the same, which makes
it hard to spot one when you're 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 it's based on a classic formula, the idea can be applied in
countless ways to deceive unsuspecting victims.
 AN OVERVIEW – PONZI
A Ponzi scheme is a fraudulent investment operation where the
operator pays returns to its investors from new capital paid to the
SCHEMES
operators by new investors, rather than from profit earned by the
operator.

Ponzi schemes occasionally begin as legitimate businesses, until the

business fails to achieve the returns expected. The business
becomes a Ponzi scheme if it then continues under fraudulent terms

The scheme is named after Charles Ponzi who became notorious for
using the technique in 1920.The idea, present in novels was actually
performed in real life by Ponzi

Typically, extraordinary returns are promised on the original

investment and vague verbal constructions such as "hedge futures
trading", “high yield investment programs” or "offshore investment"
might be used.

Initially the promoter will pay out high returns to attract more
investors, and to payoff current investors into putting in additional
money.
 AN OVERVIEW – PONZI
SCHEMES
The "returns" to the initial investors is paid out of the investments of
new entrants, and not out of profits.

Often the high returns encourage investors to leave their money in

the scheme, with the result that the promoter does not have to pay
out very much to investors.

The Simply send a statement of investment which just shows the

high amount of returns of your investment but the returns are not to
be paid off.

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

The promoter sees new cash flows as investors are told they cannot
transfer money from the first plan to the second
 THE HISTORY OF THE MASTER
MIND
Charles Pomzi was born in the Italy in the late 19th Century

After Completing Education he took Job of Postal Worker. But soon he

arrived in the city of Boston.

Once Ponzi Said “the day he arrived in Boston he had $2.51 in

pocket but $1 Million in his mind.”

Ponzi Could not prosper much with the legitimate business activities
and working as a loyal employees.

Few times Ponzi was penalized for his fraudulent activities, but Ponzi
never reveled this to his family.

Ponzi got married to Maria Gnecco in 1918, who despite of knowing

all the facts about Ponzi, married him.
 THE FIRST BIG SCAM
Ponzi was not the first one to run illegal multiple Investment pooling
scheme. But Surely he was the first one to run it on a large scale in
United States.

Ponzi understood a fact that at the time of World War – I there was
difference of exchange rates in two countries, Ponzi opted to buy
International Reply Coupons in one country where the rates are low
and sell them in the country where the rates are high.

By this mean Ponzi aimed at earning high amount of profit in very

short time. During initial days Ponzi was able to convince many of
his close one to invest in such a manner and make handsome
profits.

Ponzi offered a return of 50% in 45 days and 100% in 90 days.

Many People got fascinated with such a lucrative proposal and in no

time the investment portfolio of Ponzi had a humongous leap.
 THE FIRST BIG SCAM
The Simple theory Ponzi was using “Robb Peter to pay to Paul”.

With the ever growing portfolio Ponzi started enjoying all the leisure in
the life.

Soon with the rapid rise, Ponzi was highlighted and some kind of posts
were written about Ponzi and his Investment Schemes. Although these
posts couldn’t prove Ponzi wrong but certainly raised many questions
against Ponzi’s Investment plans.

Despite of these escapes Ponzi was always under the scrutiny of states
and the Securities Exchange.

They soon discovered that the facts that Ponzi always stats are not the
facts, state discovered that Ponzi was very much indebted and was not
stage in to pay off his debts.

On August 12, 1920 Ponzi made a confession letter surrendering himself

to state.
 PONZI SCHEMES – A GLOBAL
Here are some big PonziOVERVIEW
Schemes globally that has caused huge
financial loss to the investors of the Schemes.

BERNIE MADOFF (BERNARD L. MADOFF INVESTMENTS SECURITIES

LLC) – LOSS ESTIMATED AT $65 BILLION

Madoff’s fraud is very similar to the Ponzi’s fraud. Madoff sent fake
balance statements to every investor so that it appeared their
money was doing well and multiplying. As the markets crashed,
investors began pulling out their investments and Madoff couldn’t
provide. Investors were tricked out of $65 billion through Madoff’s
Ponzi scheme. This is famously known as the biggest Ponzi scheme
ever.

In the investigation the it revealed that J P Morgan Chase & Co. were
also the contributors to the scam and they were sentenced a penalty
of $1.7 billion.
 PONZI SCHEMES – A GLOBAL
OVERVIEW

KENNETH LAY AND JEFFREY SKILLING (ENRON) – LOSS $74 BILLION

Enron’s founder, Kenneth Lay, lost $74 billion dollars from investors
when he exaggerated the health of his company. Enron’s stock
plummeted from $90 per share to less than $1 within 1 year. Once
the 7th largest company in America, worth $68 billion, Enron ended
in 2001 when the company filed for bankruptcy. Lay was indicted on
11 counts of security fraud and related charges but died on vacation
while awaiting his court sentence. Lay was found guilty of producing
the falsified financial statements to gain the confidence of the
investors.
 PONZI SCHEMES – A GLOBAL
OVERVIEW

BARRY MINKOW (ZZZZ BEST INC.) – LOSS ESTIMATED AT $100

MILLION

In December 1986, at the age of 19, Minkow took his carpet cleaning
business public, reaching a market capitalization of over $200
million. He created tens of thousands of fraudulent documents and
sales receipts to make it appear like he was building a multimillion
dollar corporation. Suspicious overages on client bills led to an
investigation uncovering Minkow’s fraudulent revenue numbers.
Minkow was convicted of 57 felonies.
 PONZI SCHEMES – A GLOBAL
OVERVIEW
JOSEPH NACCHIO (QWEST COMMUNICATIONS INTERNATIONAL) –
LOSS ESTIMATED AT $3 BILLION

Nacchio is the mastermind behind a $3 billion financial fraud

scheme which allowed him to benefit from inflated stock prices and
insider trading. He earned $52 million selling stocks he knew were
going to plummet. After the SEC successfully sued Qwest
Communications International in 2007, Nacchio was convicted on 19
counts of insider trading and publishing falsified financial statements
by inflating the revenues. He was also ordered to return the $52
million in illegal stock trading and was ordered to pay $19 million in
fines.
 PONZI SCHEMES – A GLOBAL
OVERVIEW

SAM ISRAEL III (BAYOU HEDGE FUND GROUP) – LOSS $350 MILLION

Israel lied to his investors promising that their $300 million

investment would turn into $7.1 billion in 10 years. In 1998, when
the returns were lower than promised, Israel created fraudulent
accounting reports to make it appear that the investments were
growing. He escaped authorities and was only found after appearing
on America’s Most Wanted. In a layman language the Sam Israle III
just repeated the story of Charles Ponzi, and by promising the
unreasonable returns he acquired a considerable amount from his
investors. The only difference between ponzi and Israle III was that
Israle Succeeded in escaping from the authorities.
 PONZI SCHEMES – A GLOBAL
OVERVIEW
MICHAEL DE GUZMAN (BRE-X MINERALS) – LOSS ESTIMATED AT $3
BILLION

Michael de Guzman, an employee of Bre-X Minerals, claimed he had

found gold in the jungles of Borneo. From 1993 to 1996 he produced
thousands of core samples containing gold. The company’s stock,
which was valued at a penny before the discovery, catapulted Brie-X
Mineral’s value to $6 billion. Eventually the Indonesian government
became suspicious. They revoked 45% of Bre-X’s control of the
mine, leaving the rest to Freeport McMoran who, after much drilling,
could not find a flake of gold. As a result, BreX’s stock plunged to
zero. According to FIA’s report all the money fudged by Guzman was
used by him for his own and for the luxuries of his four wives and
nine children.
 PONZI SCHEMES IN INDIA
The Ponzi Schemes are nothing new for India.

Several Thousand Crores have been robbed from people by way of

running many fake investment pooling schemes.

The Concept of Ponzi Schemes in India was made generalized by

famous Bollywood director Neeraj Vora in his movie “Phir Hera
Pheri”. Where one innocent girl traps few multi milliners offering
super normal returns.

However many schemes had already rooted their legs in the country
before the movie was though of.

The Problem in the country is that, many such schemes ran could
not be reported as in many cases people who has suffered loss has
lost their unaccounted money or people who has effected the scams
are high profile people having serious power behind them.
 LARGE SCALE PONZI IN INDIA
Lets have a look over the large scale ponzi schemes in India that has
recently disclosed and the quantum of loss suffered by the investors.

SARADHA GROUP SCAM

Saradha Group scam was a scam involving more than 200 Private
Limited Companies.

Where Promoters were High Profile Politicians

Crores of rupees were collected from investors on account of

investment into automobile manufacturing company.

Moneys were transferred to Dubai, Singapore & Indonesia through

money laundering.

Exiting investors were paid returns out of the investments made by

the new investors.
 LARGE SCALE PONZI IN INDIA
SARADHA GROUP SCAM

The scheme faced collapsed when in January 2013 the cash inflow of
the company fell way behind the and the company went short of
money.

However the RBI has already smelled sum bas was cooking in the
company and has asked state government to investigate the
company in December 2012.

On April 6th 2013 the MD wrote a confession letter to CBI confessing

the fraud and naming many high profile politicians contributing to
the fraud.

Very soon the news wide spared into south India and many people
realized that they were found victims of a large scale pyramid ponzi
scheme.
 LARGE SCALE PONZI IN INDIA

KBC CLUBS AND RESORTS PRIVATE LIMITED

The KBC scam was effected by Mrs. Arti Chavan and Bappu Chavan
from Nashik, Maharashtra.

The duo ran a Pyramid scheme involving hundreds of small

investors, the quantum of loss was more than 991 crores.

The fraud got revealed when the investors stopped receiving the
monthly returns as committed by the company.

Many Small loss suffering victims committed suicide after the

confrontation by the accused. However the accused of the scam are
yet to be sentenced by low.
 SEBI ON PONZI SCHEMES
SEBI has increased the penalty for running the fake collective
investment scheme to 25 crores or three times of profit made by the
fraudster, which ever is higher.

SEBI has been given the mandate to take action against all such
money collection activities involving Rs. 100 crore and more.

SEBI has decided to amend its Prohibition of Fraudulent and Unfair

Trade Practices (PFUTP) Regulations “to provide for imposing
deterrent monetary penalties for illegal mobilisation of funds by
floating schemes in the nature of unregistered collective investment
schemes“

It has been proposed that any illegal mobilisation of funds without

obtaining a certificate under the CIS Regulations can be declared as
a fraudulent and unfair trade practice under the FUTP Regulations.

Prosecution has also been launched in many cases, however they

have also not been very effective due to procedural issues and
delays associated with the legal process.
 PROTECT YOURSELF: DON’T BE A
VICTIM
Although Ponzi schemes are simple in theory, they have grown more
complex and larger in recent years. Unfortunately, most investors
still haven’t learned the lessons that the mega-Ponzi schemes
should have taught.

Following trails may help an Investor to protect oneself from being a

victim of a Ponzi Scheme.

Use Common Sense. If it sounds too good to be true, it probably

is. An investment opportunity can look like a sure thing, but
investors must always think rationally rather than emotionally

Choose Wisely. Choose an investment manager just as you would

an attorney or accountant. Experience and skill should be
considered, rather than personality or charisma.

Ask Questions. Don’t be afraid to ask your investment manager

tough questions, such as “What exactly am I investing in?” and
“Who is your auditor?” Honest investment firms generally use well
established, reputable auditing firms.
 PROTECT YOURSELF: DON’T BE A
Demand Detailed Reports. Most perpetrators of Ponzi schemes
VICTIM
send periodic reports to investors with limited information included.
This is a major red flag. Honest investment firms provide very
detailed, professionally prepared reports on a regular basis,
generally monthly, quarterly, annually or all three. Reports should
include clear details about any changes in your assets – whether
you’ve made or lost money – and most will tell you where your
assets were invested.

Be Patient. The promise of significant wealth via one successful

investment is appealing, but investing should be an intellectual,
rather than an emotional, exercise.

Be skeptical. Think more about what can go wrong than what can
go right. Deal with established investment managers. Ask tough
questions about where your money is going.

If you suspect you are a victim of a Ponzi or pyramid type

scheme, don’t be a quite sufferer, one should act as a
whistle blower. By doing so one can not only claim his money
back, but also can help the mass public from falling to any
such traps.
Thank You…!!!!