Ponzi Scheme

A "Ponzi scheme" is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It was "invented" by the notorious Charles Ponzi in early 20th century.

Nowadays the Ponzi schemes are often more sophisticated but the underlying formula is quite similar. They continue to prevail because greed is a human nature.

Last week US SEC filed emergency securities fraud charges against a promoter (Pinnacle) to halt a Ponzi scheme that raised at least US$30m from around 2,000 investors in fraudulent "real estate development partnerships".

SEC alleged that from at least Oct 2006 to present Pinnacle has:

• sold interests in such scheme through a nationwide advertising campaign (including solicitation for investors in magazines & newspapers)
• promised investors a 25% return in 45 or 60 days, and a second 25% return and the return of capital after 90 days
• represented that the profits would be earned by purchasing foreclosed real estate, making minor repairs and reselling the property within 45 to 60 days.

Without disclosure to investors, Pinnacle in fact purchased property from third parties and sold it to investors at high mark-ups. The exorbitant returns promised to investors were generated by selling the property to other "fooled" investors.

Under the SFO, the above Ponzi scheme may be regarded as a collective investment scheme or regulated investment agreement. Marketing of it to the HK investing public without SFC authorization is illegal. But from time to time I've received those suspicious advertisements from different sources.

People could not eliminate greed, but at least they should learn to be smart investors. In their new book "Why We Want You To Be Rich", Donald Trump and Robert Kiyosaki even alleged that middle classes in developed countries would eventually become poor if they don't have financial education!