Question

Ponzi-Scheme

Ponzi Scheme is known as one of best examples of breach of public trust. •

Please describe what sort of principal-agent relationship exist in the Ponzi scheme, how the Ponzi scheme works, and what it does to the firm, investors, financial market/public, what SEC actions were. Please explain in detail because I have no idea what this is and I need an in depth analysis of the Pnozi-Scheme.

Please provide in depth response without copying from google!

Answer 1

In financial there is saying, if something is too good to be true, its probability not true. The same thing was with the Ponzi scheme. This scheme was a breach of the trust between the principal and agent because there was no underlying business which was there so that these types of scheme could benefit the investor in the long term. The way these schemes worked is one person invest a certain amount of money, that person has to bring additional 2 investors, Now the first investor will receive his returns from the investment amount brought in by the next two investors. Now those two people will bring additional people and they will receive their only when the other investors they brought in is bringing money. Similarly this goes on to bring a chain in which the early investor who invested are paid out of the money brought in by the late stage investors but if new investors are not being added then there would not be any new fund coming in and the investors who have invested at late stage will not be able to get return. It will reach a point where if new investors are not being added then the chain will collapse and it will break. This is known as Ponzi scheme. The investors are promised higher rates of return and investors who come at early stage benefit at the expense of the investors who come at late stage.

If the new investors are not being added then the new investment will not come and the chain will be broken and that will collapse this whole scheme. This is a fraudulent scheme where investors are promised a return far more then market return and investors are deceived. This is a serious breach of the trust in the financial market and makes investors suspicious about people even who are honestly working. The SEC has banned such activities so no such sale of financial product is allowed and in the past those people who ran these types of scheme were fined by the regulator.