The Companion Advisor:
Regulator warns investors to steer clear of Ponzi-style investment schemes; many con artists use this process to get your money
The first known Ponzi scheme was operated by Carl Ponzi himself. In 1920's Boston, Ponzi collected $9.8 million from 10,550 investors, including 75% of the Boston Police force. Ponzi then delivered $7.8 million to his investors as "return" on their investments and spent the rest of the money. Ponzi's original investors were so pleased with their "returns" that they happily helped him find more investors. The Ponzi scheme thrived until the media took notice; Carl Ponzi was finally arrested and ended up in bankruptcy court. In the end everyone lost money; the bankruptcy trustee sued the individuals who made gains from the Ponzi scheme so Carl Ponzi's debts could be paid to his creditors.
How did Ponzi lure so many people into his scheme? Investors were attracted to Ponzi's plan because he guaranteed high returns over a short period of time - profits of 50% every 45 days. Unfortunately these returns were not from the success of a real investment. Instead, the returns were paid from the investors' own money and the contributions of other investors. The essence of the Ponzi scheme is that money is 'borrowed from Peter to pay Paul'.
Today's Ponzi schemes look like real investment opportunities. These schemes work well because:
Ponzi schemes spread by word of mouth. As more people
hear of the apparently profitable investment, more investors want to get
in on it. Early investors are paid out of money from new investors, at
times for many years until the Ponzi collapses. The Ponzi scheme comes
to an end when the number of new investors inevitably falls. With fewer
new investors, there is no new money to pay the returns. If you lose your
money to a Ponzi scheme, chances are you will not get your money back.
The Ontario Securities Commission administers and enforces Ontario's securities law. Its goals are to provide protection to investors from unfair or improper practices and to foster fair and efficient capital markets. The OSC offers a range of educational materials to investors free-of-charge. To obtain an Investor Education Kit call the OSC Contact Centre at (416) 593-8314, toll-free 1-877-785-1555, email firstname.lastname@example.org or review the materials on www.osc.gov.on.ca.
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