Investment Traps to be
Watchful For
Most popular scheme/scams
1.Ponzi Schemes/Scams
2.Pyramiding Schemes/Scams
Ponzi Schemes/Scams
Charles Ponzi
Ponzi Scheme/Scam A Ponzi scheme is essentially an investment
fraud where the operator promises high financial returns or dividends (6%-29% per month).
The operator invests victims' funds and pays "dividends" to initial investors using the principal amounts "invested" by subsequent investors.
Simple fraud whereby initial investors are paid exceptional returns from the deposits of a growing number of new investors
Ponzi Scheme/Scam It is a fraudulent investment operation that
pays returns to separate investors, not from any actual profit earned by the organization, but from the money paid by subsequent investors.
“Profits” to investors are not created by the success of the underlying business but instead are derived from the capital contributions of others.
Schemes always offer an economic purpose so that investors think they are investing in a viable venture that generates income.
Ponzi Scheme/Scam
The scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of "dividends.“
Guarantee payments by issuance of postdated checks (generally 7 checks per investor)
How Ponzi Scheme/Scam Operates
Ponzi Company
investor investor investor
Counselor/Agent (individual or Corp)
Cont.
Company
A invests
Promise of unusually high interest rates (4% to 20% A MONTH
Company returns part of A’s investment as “interest”
A tells others of good investment opportunity
Cont.
Company
A invests B invests
Company pays A’s next interest due from B’s money
Company returns part of B’s investment as “interest”
A and B tell others of good investment opportunity
Cont.
Company
A invests B invests C invests
Company pays B from C’s money
Company returns part of C’s investment as “interest”
Company pays A from B’s & C’s money
The Cycle continues
Pyramiding Scheme/Scam
Pyramiding Schemes
Pyramiding Schemes
Stage Participants NotesLevel 1 8 Each participantLevel 2 64 recruits 8 new Level 3 512 investors (Level 2
Level 4 4,096 2 pays off LevelLevel 5 32,768 1 and so on)
Level 6 262,144 Level 7 2,097,152
Level 8 16,777,216Level 9 134,217,728 - More than the
Philippine PopulationLevel 10 1,073,741,824 – More than triple the US population
Level 11 8,589,934,592 – More than the world’s population
Pyramiding Scheme Pyramid scheme is an investment fraud which
rewards participants for inducing other people to join the program.
A distribution scheme in which a participant pays for the chance to receive compensation for introducing new persons to the scheme and these new persons themselves introduce new participants
Focus primarily on the exchange of money for recruitment
Pyramid Scheme
The selling point: each participant can recoup his original investment and make more money by introducing more participants.
It hides scam by layering it with products, even if these products:o Have no real world valueo Are priced in an inflated manner
Pyramid Scheme
They claim huge profits through continued growth of “downlines” or bonuses based on your advancement in the structure.
The marketing of a product or service, if done at all, is only of secondary importance in an attempt to evade prosecution or to provide a corporate structure.
Pyramid Scheme Pyramid schemes are inherently injurious to
consumers because as a mathematical certainty they are doomed to collapse
Only those on top make money, hence the stress on:
• Positioning• Timing• Getting downlines (you must be on top)
Distort concept of entrepreneurship
Distinctions In ponzi scheme, the schemer
acts as a “hub” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. (In fact, failure to recruit means no investment return.)
Distinctions A ponzi scheme claims to rely on
some esoteric investment approach (insider connections, etc.) and often attracts well-to-do investors; whereas, pyramid schemes explicitly claim new money will be the source of payout for the initial investments.
Distinctions A pyramid scheme is bound to
collapse much faster because it requires exponential increases in participants to sustain it. By contrast, ponzi schemes can survive simply by persuading most existing participants to “reinvest” their money, with a relatively small number of new participants.
The Lure of Multi-level Marketing
Is Network Marketing a Pyramid Scheme?
Pyramid Scheme (Illegal scam)
o A fraudulent money-making scheme that is based on a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme without a legitimate product or service delivered. Eventually the number of new recruits fails to sustain the payment structure and the scheme collapses with most people losing the money they paid in.
How to identify pyramid schemes
o The easiest way to identify pyramid schemes:
• firstly there is no legitimate product or service involved (i.e. you do not get a legitimate product in return for your initial investment).
• The second way is that you do not get a
financial return unless you have successfully introduced a number of new recruits into the pyramid. Pyramid schemes concentrate on the money that you could earn by recruiting new people into the pyramid and generally ignore the marketing and selling of any products or services
How to identify pyramid schemes
Network Marketing (Legitimate, legal business model)
o The concept behind network marketing is a distribution model that allows a company to sell products directly to the consumer.
o Choosing to use a word of mouth approach (networking) instead of advertising through traditional streams (eg media).
o Instead of paying the media for advertising, network marketing company are structured to reward distributors through commission in return for selling their products and finding new customers.
How to identify pyramid schemes
The main focus of network company is product distribution. In a legitimate network marketing company, distributors are not required to recruit new distributors in order to earn a commission, they can earn money purely for selling the company’s product.
Those who do not want to be sales person, choose to recruit more distributors into their organization as a means to build their referral base. Thus, creates a group of loyal customers and allows one to leverage the efforts of others and create a residual stream of income.
Two Questions to ask to determine a legitimate
company from a fake one
1. Is there a legitimate product involved?
What do you get in return for your start up investment other than the potential to earn good money? If you’re not getting a product or service or if the training tools appear to be overpriced, it could be a scam.
2. Do you get commissions based on product distribution or on recruitment?
If they are paying commissions based purely on recruitment, it is a scam.
Consider also the following factors
Be aware of hype and ground floor opportunities – Although some people might claim you earn more money if you get in first, this is never the case and these are companies that normally fold up within the first couple of years.
Does the company have proven track record? – If the company has been around for a few years then there is a fair chance that governing bodies that police pyramid schemes have already pulled the business model apart and given them clean bill of health.
Will the company buy back any unsold product? Most network marketing companies have a money back guarantee which means that if you are unhappy with the products, you can send them back for a refund. Naturally a pyramid scheme is not going to refund your money.
Is there a get rich scheme? – Although there is a lot of potential to earn very good money in network marketing very few have made it quick, most make their millions though consistent effort, If it sounds too good to be true, it probably is.
Effect of Technology
Ponzi and Pyramid Schemes have found their way on the Internet making it hard for the scammers to be prosecuted since there is no contact with the clients and the transactions are cross-border.
RED FLAGS
HIGH INVESTMENT RETURNS
OVERLY CONSISTENT RETURNS
UNREGISTERED INVESTMENTS
UNLICENSED SELLERS
SECRETIVE/COMPLEX STRATEGIES
There are three things in this world that deserve no mercy, hypocrisy, fraud and tyranny.
Frederick William
Robertson
