Ponzi scheme

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organization running the operation. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme. The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. Ponzi did not invent the scheme (for example, Charles Dickens' 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme), but his operation took in so much money that it was the first to become known throughout the United States. Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors' money to make payments to earlier investors and himself. 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. The promoter sells shares to investors by taking advantage of a lack of investor knowledge or competence, or using claims of a proprietary investment strategy which must be kept secret to ensure a competitive edge. Ponzi schemes sometimes commence operations as legitimate investment vehicles, such as hedge funds. For example, a hedge fund can degenerate into a Ponzi scheme if it unexpectedly loses money (or simply fails to legitimately earn the returns promised and/or thought to be expected) and the promoters,

instead of admitting their failure to meet expectations, fabricate false returns and, if necessary, produce fraudulent audit reports. A wide variety of investment vehicles or strategies, typically legitimate, have become the basis of Ponzi schemes. For instance, Allen Stanford used bank certificates of deposit to defraud tens of thousands of people. Certificates of deposit are usually low-risk and insured instruments, but the Stanford CDs were fraudulent. Initially the promoter will pay out high returns to attract more investors, and to lure current investors into putting in additional money. Other investors begin to participate, leading to a cascade effect. The "return" 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; he simply has to send them statements showing how much they have earned. This maintains the deception that the scheme is a fund with high returns. 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. If a few investors do wish to withdraw their money in accordance with the terms allowed, their requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent.

Double Shah
Sibtul Shah, alias Double Shah (born 3 March 1964), was a teacher who started a financial scam, a Ponzi scheme, in Pakistan. Syed Sibtul Hassan Shah is a resident of Pak town - a lower middle class area - in Wazirabad, a tehsil of Gujranwala. He was born in Koloke, a small town of Sambrial Tehsil, in Sialkot District, Punjab. He has been sentenced 14 years imprisonment.

The peoples who took advantage from double shah are Sahabzada Imran-ulHaq, Irfan Mughal, Ifthakhir Mughal, Javaid Mughal. He is a BSc and BEd and was a science teacher at Government High School, Nizamabad until 2005. After taking leave from his job, he went to Dubai where he stayed for about six months. Upon his return, he left his job and approached his colleagues and neighbours, asking them to give him their savings, which he would return in double in just 15 days. The first person to trust him was his next-door neighbour who owned a marble business named Javed Marble Factory. He was followed by many of Shahs colleagues. As promised, their investments were doubled in 15 days. This was a Ponzi scheme where investors were offered 100% return on their investment in just 15 days, later extended to 70 days. His Ponzi Scheme was at its peak when it was exposed by daily The Nation Lahore in an investigative piece published on the front page on April 6, 2007. Double Shah was arrested by the Gakkhar police on 13 April 2007 from his Nizamabad house on charges of Rs. 30,000 robbery. He is now in the custody of the National Accountability Bureau. The first case was logged against him with other 18 persons by the local police under the Anti-Terrorist act, and only one person was released on bail by the judge of the Anti-Terrorist court, in Gujranwala, Pakistan. His coaccused, Ijaz Cheema, was released on bail. The amount of money that he stole during his 18 months of business was over Rs. 70 billion (almost USD 1 billion). Syed Sibt-ul-Hassan Gillani, alias Double Shah, was convicted by Accountability Court of Lahore. Pakistan on July 1, 2012. He was sentenced to 14 years Rigorous Imprisonment and fine equavalent to total liability against him (Pak Rs. 5.4 Billion) less the amount recovered or being recovered in this case. All of his moveable and immoveable assets were also confiscated.

Harshad Mehta Harshad M Mehta was an Indian stockbroker, well known for his wealth and for having been charged with numerous financial crimes that took place in

1992. Of the 27 criminal charges brought against him, he was only convicted of one, before his death at age 47 in 2001. It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered in "ready forward" transactions between banks. Mehta was convicted by the Bombay High Court and Supreme Court of India for his part in a financial scandal valued at INR5000 crore (US$770 million) which took place on the Bombay Stock Exchange (BSE). In reality he actually exposed the loopholes in the Bombay Stock Exchange (BSE) transaction system and SEBI further introduced new rules to cover those loopholes. He was tried for 9 years, until he died in the late 2001. On 23 April 1992, journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying. Sucheta Dalal reveals Mehta's Scam The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jewellery. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. Sucheta Dalal, The Times of India , A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasnt the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being

known only to the broker. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Another instrument used was the Bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e., the seller of securities, gave the buyer of the securities a BR. As the authors write, a BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer. Having figured out his scheme, Mehta needed banks which issued fake BRs (Not backed by any government securities). Two small and little known banks the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee, the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. This went on as long as the stock prices kept going up, and no one had a clue about Mehta's operations. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value the banking system had been swindled of a whopping INR40 billion (US$610 million). When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would be accused if people came to know about his involvement in issuing checks to Mehta. M J Pherwani of UTI was also linked to Mehta.