Issues
Of Confidence Tricksters and Ponzi Schemes
Beware lest you lose the substance by grasping at the shadow–Aesop-Fables, Deception
Duped
Recently a rich old lady residing in Colombo 7 had been duped by a con woman who pretended to be a rich owner of a business dealing in garment exports. The lady met this woman at the Hotel Hilton and soon developed a friendship. When the Government decreased interest rates the lady was invited to withdraw her deposits placed in a reputed finance company and invest the money in the alleged business run by the said woman, who promised to pay Rs.10, 000/- a day for a deposit of Rupees Six Million. The money was given to the woman who continued to pay Rs.10, 000/- per day as promised for ten months, thus building the confidence of the lady. Thus, a total sum of Rupees. Three Million was returned. Then the woman said that her business needed more capital and made the lady to ‘mortgage’ her properties in Sri Lanka one after the other and collected nearly Rupees Thirty Million and went on paying the same interest stating that she will return the money once the investments started to yield profits.
Tricked
Later the residential house in Colombo 7 worth over Rupees One Hundred Million was kept for a sum of Rupees Five Million which the woman claimed to have been paid to her by the owner of a casino operating in Colombo.It
"Recently a rich old lady residing in Colombo 7 had been duped by a con woman who pretended to be a rich owner of a business dealing in garment exports. The lady met this woman at the Hotel Hilton and soon developed a friendship. When the Government decreased interest rates the lady was invited to withdraw her deposits placed in a reputed finance company and invest the money in the alleged business run by the said woman, who promised to pay Rs.10, 000/- a day for a deposit of Rupees Six Million. The money was given to the woman who continued to pay Rs.10, 000/- per day as promised for ten months, thus building the confidence of the lady. Thus, a total sum of Rupees. Three Million was returned. Then the woman said that her business needed more capital and made the lady to ‘mortgage’ her properties in Sri Lanka one after the other and collected nearly Rupees Thirty Million and went on paying the same interest stating that she will return the money once the investments started to yield profits"
was revealed that although the documents signed in all the transactions were purportedly mortgage bonds, they had actually been deeds of transfer, without the knowledge of the lady. A letter has been received by the lady asking her to hand over vacant possession of her residential property which has thus been fraudulently acquired. The matter is under investigation by the police. This is a true story and has been related in this column to make the readers aware of the manner in which confidence tricksters operate in our little island paradise .This operation is known as a Ponzi scheme. Last weekend some newspapers carried a notice by the Ministry of Defence and Urban Development announcing that a Special Unit has been formed by the CID to investigate into unlawful or criminal misappropriation of house and property by cheaters, impersonators, thugs or any person without proper legality. One contact telephone number of the Special Unit given was 1933.
Fraudulent
A Ponzi scheme is a fraudulent investment which returns proceeds to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. The system is destined to collapse because the earnings, if any, are less than the payments to investors. The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. Ponzi did not invent the scheme (for example, Charles Dickens’s 1857 novel Littlr Dorrit described such a scheme), but his operation took in so much money that it was the first to become known throughout the United States. In such a scheme at some point one of the following happens:
The promoter vanishes, taking all the remaining investment money (minus payouts to investors already made).
Since the scheme requires a continual stream of investments to fund higher returns, once investment slows down, the scheme collapses as the promoter starts having problems paying the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing).
External market forces, such as a sharp decline in the economy cause many investors to withdraw part or all of their funds.
Golden Key scam
In Sri Lanka the collapsed Golden Key Credit Card Company run by Lalith Kotelawala and the Companies run by Sakvithi Ranasinghe operated such schemes in a large scale. The negligence of duty by the Ministry of Finance
Lalith and Cecille kotelalwela
headed by the President and the Monetary Board of the Central Bank headed by the Governor in failing to act on the report given by the Special Investigation Unit as observed by the Supreme Court to prohibit such unlawful operations resulted in misery, suicide and untimely deaths of depositors who had been reduced to paupers after their life savings were robbed by these swindlers. This indicates that when the President, who is on a very busy schedule with the Presidential tasks undertakes the supervision of many Ministries such mistakes are bound to occur, which results in grave injustice to the citizens. Often the high returns lead investors to leave their money in the scheme, leading the promoter to not actually have to pay out very much to investors; they simply have to send statements to investors showing them how much they earned. This maintains the deception that the scheme is a fund with high returns. A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes:
a) In a Ponzi scheme, the schemer acts as a “hub” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly.
b) A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors; whereas pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
c) A pyramid scheme typically collapses much faster because it requires exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive simply by persuading most existing participants to reinvest their money, with a relatively small number of new participants.
As making the readers aware of the existence of such confidence tricksters is the duty of the media, readers are warned to keep away from such tricksters. Let me conclude .as usual in lighter vein with a humourous anecdote. A balding man went into a barber’s shop and asked how much it would be for a haircut. ”Twenty Five Dollars” said the barber. ”Twenty Five Dollars, that’s outrageous!” said the man I’ve hardly got any hair. How can it be that expensive?” The barber explained: ’Its five dollars for the hair-cut, and twenty dollars for the search fee”.
The writer is an Attorney-at-Law