CASE STUDY ON

CHARLES PONZI

- PURVI GERA
WHO WAS CHARLES PONZI??
Charles Ponzi i.e. Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi(born- March 3,
1882 – January 18, 1949) was an Italian swindler and con artist in the U.S. and
Canada. Born and raised in Italy, he became known in the early 1920s as a
swindler in North America for his money-making scheme.
 ORIGINS OF PONZI SCHEME:-
• Orchestrated by Charles Ponzi in 1919.

• The postal service, at that time, had developed international reply coupons
that allowed a sender to pre-purchase postage and include it in their
correspondence.

• The receiver would take the coupon to a local post office and exchange it
for the priority airmail postage stamps needed to send a reply which were
expensive.
 ORIGINS OF PONZI SCHEME:-
Ponzi hired agents to purchase cheap international reply coupons in other
countries and send them to him.

• He would then exchange those coupons for stamps and the stamps were
sold as profits.

• This type of exchange is known as an arbitrage, which is not an illegal practice.

•
 ORIGINS OF PONZI SCHEME:-

• Ponzi became greedy and expanded his efforts. Under the heading of his
company, Securities Exchange Company, he promised returns of 50% in 45
days or 100% in 90 days.

• Due to his success in the postage stamp scheme, investors were

immediately attracted. Instead of actually investing the money, Ponzi just
redistributed it and told the investors they made a profit.
ORIGINS OF PONZI SCHEME:-

• The scheme lasted until 1920, when an investigation into the Securities
Exchange Company.

• The scheme is named after Charles Ponzi, who became notorious for

using the technique in the 1920s.

 CHARACTERISTICS:
• The basic premise of a Ponzi scheme is "To rob Peter to pay Paul"

• Initially, the operator will pay high returns to attract investors and entice current investors
to invest more money.

• When other investors begin to participate, a cascade effect begins. The "return" to the
initial investors is paid by the investments of new participants, rather than from profits of
the product.
CHARACTERISTICS:
• The operator will simply send statements showing how much they have earned, which maintains the
deception that the scheme is an investment with high returns.

• Investors within a Ponzi scheme may even face difficulties when trying to get their money out of the
investment.

• Operators also try to minimize withdrawals by offering new plans to investors where money cannot
be withdrawn for a certain period of time in exchange for higher returns. The operator sees new cash
flows as investors cannot transfer money.

• 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, or financially sound.
 CHARACTERISTICS:
• Ponzi schemes sometimes commence operations as legitimate investment
vehicles, such as hedge funds.
• Hedge funds can easily degenerate into a Ponzi- type scheme if they
unexpectedly lose money or fail to legitimately earn the returns expected.
• If the operators fabricate false returns or produce fraudulent audit reports
instead of admitting their failure to meet expectations, the operation is then
considered a Ponzi scheme.
 RED FLAGS OF PONZI
SCHEME
According to the United States Securities and Exchange Commission (SEC), many Ponzi
schemes share similar characteristics that should be "red flags" for investors.The warnings
signs include:

High Investment Returns With Little Or No Risk:- Every investment carries some degree of risk, and
investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed"
investment opportunity.

Overly Consistent Returns :-Investment values tend to go up and down over time, especially those
offering potentially high returns. Be suspect of an investment that continues to generate regular,
positive returns regardless of overall market conditions.
 RED FLAGS OF PONZI
SCHEME
Unlicensed sellers :- Federal and state securities laws require investment professionals and their firms to
be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

Secretive And / Or Complex Strategies :-Avoiding investments you do not understand, or for which you
cannot get complete information, is a good rule of thumb.

Issues with paperwork :-Do not accept excuses regarding why you cannot review information about an
investment in writing. Also, account statement errors and inconsistencies may be signs that funds are
not being invested as promised.
Difficulty Receiving Payments :-Be suspicious if you do not receive a payment or have difficulty cashing
out your investment. Keep in mind that Ponzi scheme promoters routinely encourage participants to
"roll over" investments and sometimes promise returns offering even higher returns on the amount
rolled over.

Unregistered Investments :-Ponzi schemes typically involve investments that have not been registered
with the SEC or with state regulators. Registration is important because it provides investors with
access to key information about the company's management, products, services, and finances.
GOVERNMENT MOVE TO CURB
PONZI SCHEMES
These bills aim to regulate the solicitation and acceptance of deposits by various business
entities which otherwise are not regulated by regulators such as RBI, SEBI etc.

Investors, be aware!!!!These schemes can be spotted with certain abnormality associated

with them.

Firstly, these schemes promise an abnormally high rate of return.

Secondly, they promise a guaranteed return. Mind you investors, a very few schemes give
a guaranteed return. Also, in the realm of the real world, high return and guaranteed
return don’t go hand in hand.