Department of Commerce & Consumer Affairs Business Registration Division Office of the Securities Commissioner

Investor Education Program

12/28/09

Investment Fraud: The Ponzi Scheme

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

What is a Ponzi Scheme?

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The “Ponzi Scheme”, named after the 1920’s swindler Charles Ponzi, is a ploy or a fraudulent investment operation where earlier investors are paid with funds given by subsequent investors.

Source: NASSA Raid Response #2: Madoff – A 21 st Century Ponzi Scheme State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Understanding a Ponzi Scheme Ponzi Promoter

Investor A invests $

Source: NASSA Securities 101: Handbook For Law Enforcement Officials State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Understanding a Ponzi Scheme Ponzi Promoter

Investor A invests $ Investor B invests $

Source: NASSA Securities 101: Handbook For Law Enforcement Officials State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Understanding a Ponzi Scheme

Ponzi Promoter Investor A invests $ Investor C invests $ Investor B invests $

Source: NASSA Securities 101: Handbook For Law Enforcement Officials State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Collapse of a Ponzi Scheme

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As the number of total investors grows and the supply of potential new investors dwindles, there is not enough money to pay off promised returns and cover investors who try to cash out.

The scheme starts to collapse with investors losing all or most of their investment.

Source: NASSA Raid Response #2: Madoff – A 21 st Century Ponzi Scheme State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Burst of a Ponzi Scheme

$ $ $ $ $ $ $ $ 

The Ponzi bubble bursts when the con artist simply cannot keep up with the required payments.

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In many cases, the promoter or con artist has spent the investment money on personal expenses, depleting funds and accelerating the bursting of the bubble.

Source: NASSA Raid Response #2: Madoff – A 21 st Century Ponzi Scheme State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

How to Protect Yourself Against Ponzi Schemes

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Beware of promises of unrealistic returns.

Diversify – everything.

Don’t rely on reputation or word of mouth alone.

Understand your investments.

Source: NASSA Raid Response #2: Madoff – A 21 st Century Ponzi Scheme State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

How to Protect Yourself Against Ponzi Schemes

  

For large investment schemes, ask who the auditor is and check out the auditors on the internet.

Check registration and background of individual selling the investment by contacting the Securities Compliance Branch at 586-2722.

Report investment fraud by contacting the Securities Enforcement Branch at 587-2267.

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Red Flags for Ponzi Schemes

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The investment is exclusive for “only” a special group of people.

Poorly written information on the investment product and the business.

Vague or overly complicated explanations of how the business runs and how money is made.

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Investments promoting no downside or risk.

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Red Flags for Ponzi Schemes

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Pressure to sign now and get your copies later.

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High or unrealistic returns in a short period of time.

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Not registered with the State Office of the Securities Commissioner Compliance Branch.

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Recent Ponzi Cases in Hawaii

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Billion Coupons, Inc. (BCI) Marvin Ray Cooper

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$3.9 million

 – –

WeCorp Inc.

Stuart William Jones & Payton Jones Lowe Over $2.2 million

 – –

The Swiss Group Joseph W. Sullivan $8.1 million

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

How We Can Help

DCCA Securities Branches:

1. Regulate Call 586-2722

To check on your broker/adviser registration

2.Protect

Call 587-2267

To report securities fraud (Toll Free) 1-877-477-2267

3.Education

Call 587-7400

To request educational information and presentations

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Beware

Charles Ponzi $10 million 1920 Bernie Madoff $65 billion 2008

Who’s next?

How much?

When?

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program

Contact Information

DCCA Office of the Securities Commissioner 335 Merchant Street, Rm 203 Honolulu, HI 96813

Office Hours:

Mon- Fri/7:45am – 4:30pm

Website:

www.investing.hawaii.gov

To report investment fraud call our Scam Line: 587-2267 or Toll Free 1-877-447-2267

State of Hawaii DCCA, Office of the Securities Commissioner – Investor Education Program