Research Assignment: Ponzi Scheme, Genuine Enterprises (Essay Sample)

Ponzi Schemes
Student
University
Ponzi Schemes
Summary
A Ponzi scheme is a type of investment scam in which confidence in the success of a fictional enterprise is nurtured by the payment of speedy returns to the first depositors from money financed by later investors CITATION Kat12 \l 1033 (Phelps & Rhodes, 2012). Ponzi scheme operators usually lure new investors by promising earnings that are higher than in other investments. The returns are unusually high and strangely consistent in the short run.
Normally, Ponzi schemes begin as genuine enterprises up to the time that that they fail to realize the promised returns. When the business continues under deceitful terms, it is then becomes a Ponzi scheme. Whatever the situation at the start, the business needs the flow of money to be ever increasing from new investors in order to be perpetual and sustainable.
The arrangement is named after a rogue businessman called Charles Ponzi who was infamous in using the method in the early 1920s. Before then, the idea of Ponzi Schemes was only read about in novels such as Martin Chuzzlewit written by Charles Dickens in 1844 and another one called Little Dorrit written in 1857. Ponzi decided to practice the ideas in the novel in real life by taking huge amounts of money making it the first such scheme to be known across the United States. Ponzi based his original scheme on the arbitrage of global reply coupons for stamp price. Initially, he used the funds to buy the international postage coupons at low exchange rates and then redeemed them for the United States postage stamps that are of higher value. Ponzi would then sell the stamps at the higher price and then entice investors with a 50 % return promise within three months. However, he used the money deposited by later investors to make payments to himself and earlier investors.
A good case example of a Ponzi scheme is the Bernie Madoff Ponzi scheme case. He started off with $5000 and was able to attract big time clients. He promised an annual return of not less than 10%. His business grew tremendously within a short period of time and by 1980s, it controlled approximately 5% of the trading in the New York Stock Exchange. Madoff’s scheme came to the light when he decided to issue checks when dates for the issuance were actually not due. This made his sons to suspect his dealings and after they questioned him, he admitted that one of his firm subsidiaries was a Ponzi scheme. This prompted his sons to report him to the federal authorities and he was arrested the following day.
Economic Effect on These Ethical Issues
In addition to the fact that Ponzi schemes are illegitimate, the schemes are highly unethical. The schemes are often based on intentions of acting in a fraudulent and corrupt manner for self-gain CITATION Mic16 \l 1033 (Dion, Weisstub, & Richet, 2016). People who engage in activities that lead to such schemes are usually trusted by the investors. However, they do not exercise the trust accorded to them in a responsible way. Madoff misused the fiduciary trust that his clients had on him. He dishonored the confidence and abused the power bestowed upon him by the investors. His actions were inspired by self-indulgence and he believed that he could just get away with the scheme.
Many people lost their money the day Madoff was arrested and his firm closed. This is because the funds deposited by later investors were actually used to pay earlier ones, meaning that there was none left to refund the latter ones when the business was closed by authorities. For instance, an investor who deposited $1 million and withdrew $1.2 million after 15 years, the balance for this person when the business was closed was probably $500,000. This is money that was for this particular client, but he/she lost it after the business closure.
The fact that Madoff was actually running a Ponzi scheme and ...