Even in today?s world, with such high degrees of investor education along with investor grievance redressal mechanisms, and in general a much more investor friendly market than ever before, investment scams abound and continue to disconcert investors in not only India, but all over the globe. A multitude of investment scams have been developed over the years by embezzlers, some with such precision that they go unnoticed by innocent investors as we speak. The following are a few scams popularized in the past, used to con unsuspecting investors:
PONZI SCHEME:
The infamous Ponzi scheme, developed by Charles Ponzi in the 20s, was most recently revealed to have been employed by Bernard Madoff in his asset management firm to con investors. In a Ponzi scheme, initial investors are attracted by a display of false financial results, and their returns are paid by the money invested by a new round of investors. The difference in the amount paid and the amount garnered is the earning of the embezzler, which keeps building up with each successive round of investors.
PYRAMID SCHEME:
This scheme is similar to the Ponzi scheme in that it depends on the recruitment of each successive round of ?investors?. This scheme is essentially a business model in which one person recruits a number of others and charges them a fee for joining the business. Each new recruit goes on to hire new recruits into the business, who are all charged a fee, out of which the previous recruiter gets a cut. Each successive round brings profit for each recruiter, and the earnings increase exponentially.
MATRIX SCHEME:
The matrix scheme involves forming a queue of potential buyers of a product. The persona the head of the queue is rewarded an item if a specified number of people behind him in the queue buy items of nominal value. To get the reward the person at the head must refer persons to the queue and make them purchase the nominal items. As the person at the head leaves the queue after being rewarded, the next person comes to the first position and must refer another person to the queue to buy the nominal item, to get the reward. In this manner the queue is maintained and the reward is funded through the purchase of the nominal items. The margin is the profit earned by the operator.
PROMISSORY NOTE SCAMS:
These are relatively easier to spot and are very simple in their scheme. A promissory note is an instrument through which the borrower promises the lender to pay back the amount lent after a certain period of time. The scam is that the fraudster entices investors through high interest notes, but forwards the money to the borrowers at an even higher rate. Or the money is not forwarded at all, and the fraudster absconds.
PUMP AND DUMP:
In this scheme, a group of brokers initially buy an inconspicuous stock, and then recommend it to a number of investors. This raises the price of the share manifold due to the increased demand, and the shares are then sold at a high price. This further results in a quick downfall in the price of the stock, leaving the investors with huge losses.
