According to an article in the Wall Street Journal: The U.S. Securities and Exch

Question

According to an article in the Wall Street Journal: The U.S. Securities and Exchange Commission (SEC) on Wednesday filed charges against the investment company GTF Enterprises Inc. … The SCE complaint alleges that Gedrey Thompson and GTF conducted an offering fraud and Ponzi scheme to unsophisticated investors. Thompson and his associates “conned at least 20 investors into investing over $800,000 in GTF by promising lofty, but false, investment returns with guaranteed safety of principal, among other things,” the SEC complaint said. a. What is a Ponzi scheme? b. How do the operators of a Ponzi scheme manage to keep it going? Are investors to blame for believing they can get rich quickly as this article indicates?

Explanation / Answer

A.
The Ponzi scheme is the fraudulent investment scheme that offers abnormally high returns to the investors. The higher returns are issued to the old investors from the revenue generated from the new investors. Here under the Ponzi scheme, there is no any legitimate business activity, trading or other investments that can give stability and real return to the investors.
B.
Operators of a Ponzi scheme come up with lofty promises of abnormally high return and promise to protect the principal amount. To assure the old investors, they issue the check of returns once they involve the new investors. It brings credibility to their work. Later on, they show the checks to other new investors and get funds for the Ponzi scheme. Once new investors come in, old investor are paid from the funds deposited by the new investors. It forms a pyramid structure of investors that get busted in due course of time.
C.
Investors can be blamed up to a limited extent for their unreasonable expectations, greed and tendency to get rich quickly. But, there are other reasons that are responsible for such schemes to emerge. The first reason is the lack of awareness and education program for the investors that make them fall in the trap. The second reason is the lack of proactive policies that could prevent such schemes from duping the common investors. There should be a provision of strict penal action with other penalties for those who involve and manage the Ponzi schemes.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.