Question

Recently, a student came into a faculty member’s office and handed the faculty member a card he had found in the business school building advertising a company called 12 Daily Pro. He said someone had been distributing these cards around the building, encouraging students to invest in a “business opportunity.” It suggested that you could invest $6 to $6,000 and earn a 44 percent return in 12 days. The card called this program a “new eco- nomic paradigm.” The faculty member decided this had to be a Ponzi-type scheme and sent an e-mail to all students in the school reminding them that such schemes are illegal, unethical, and immoral. The next day a local TV channel carried the story, and the fol- lowing day the electronic payment service for the scheme froze all the company’s accounts and essen- tially shut them down. A few weeks later, the SEC filed a securities fraud charge against the head of the company and against the company itself, calling it a Ponzi scheme.

Questions

1. What do you think made the faculty member believe this was a Ponzi-type scheme?

2. What is the annual return the scheme operators were promising on investments in this scheme?

3. Why do you think this scheme, which had been operating for over a month, attracted so many investors?

4. Was the action taken by the faculty member appropriate?

Answer 1

(1).

As per iformation of the question it is clear that a student informed the faculty member about that scheme that generates 44% return in just 12 days. Hence beting a faculty member, it is very simple and clear that a faculty member can understand it very well that any financial scheme can not generate 44% return in just 12 days.

So it is clear that due to this very high rate of return in very less time a wise man can easily understand main motive of such schemes. Apart from this as he is a faculty member so definitely he has some past knowledge about such ponzi type schemes.

(2).

As per information of the question it is given that 44% return will be in 12 days.

So for calculating annual return we need to convert it into 365 days return;

Now let’s calculate it with the help of following equation;

In 12 days……………44% return

In 1 day………………44 / 12

Thus in 365 days …….(44 * 365 / 12) = 1338.33% (Approx.)

(3).

In past time, we have seen that some ponzi scheme had attracted so many investors and as per question this scheme is being operated since over a month, and attracted so many investors. For this there are following reasons;

·        Unexpected & very high return on the invested amount will attarct so many of the investors towards such ponzi schemes.

·        Most of the investors have desire to earn more money in very short-period of time, that is why such ponzi scheme attract many investors.

·        Less investment related formalities also an factor to attract more investors because as these ponzi schemes are illegal that is why such scheme do not follow legal process of investment.

(4).

Yes, Action taken by the faculty member was appropriate because it is duty of every educated citizen of a country to make aware all investors about such ponzi schemes. As he is a faculty member so it becomes more important to guide students about the right or wrong.