| Glossary of
Financial Terms | | |
The Companion Advisor:
General Interest
Regulator
warns investors to steer clear of Ponzi-style investment schemes; many con
artists use this process to get your money
Provided
by The Ontario Securities Commission
The Money Management Newsletter
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:
- Investors receive "interest" cheques (which
are really the return of their own money), and they encourage their
friends and family to invest;
- Investors regularly receive account statements that
show profits (which are not real);
- Investors rarely research the investment, or check
the background of the person offering the investment.
- The Ponzi operator often convinces investors to put
their 'profits' back into the Ponzi; ultimately they lose their original
investment plus any profits they may have earned.
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.
Although a Ponzi scheme can be difficult to spot, the following tips will
help you protect your money from con artists:
- Watch out for investment promotions that offer guaranteed
high returns and low risk. If an investment has a high return, you are
taking a large risk with your money.
- Check the registration of the investment, and the
person or company offering it. Many Ponzi operators are not registered
to sell securities, nor is the investment itself registered. To check,
call the OSC Contact Centre toll-free at 1-877-785-1555.
- Get a second opinion from your financial adviser,
lawyer or accountant.
You can learn more about fraud and other investment topics on-line at
www.InvestorED.ca.
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
inquiries@osc.gov.on.ca or
review the materials on www.osc.gov.on.ca.
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, Fiscal Agents Money Management Newsletter
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