Comparative Business Ethics And Social Responsibility For Essential Investment

Difference and Similarity in Ponzi and Pyramid Scheme

Discuss about the Comparative Business Ethics and Social Responsibility for Essential Investment.
 

The investment fraud is the ones who promise to provide high rate of interest in the market. They greed of making the money in an easy way enables to overpowers the financial knowledge. The investors get attracted because of the schemes and the promise which are though impossible to get returns from the business models of the new or emerging companies. Fraudsters are often involved in the complex scheme and the false promises to the investors. Now it is obvious that returns are directly proportionate with the risk. It gives a constant high returns as it makes the first sign on the making of the investment fraud (Dimmock and Gerken 2012). 

A Ponzi scheme is the essential investment fraud in the operation of the return in finance or the dividends which are not available through the traditional investment. The scheme is named after the Charles Ponzi of Boston who operates in a scheme which guaranteed the investors in return on their investment. Pyramid scheme is the fraud, multi-level marketing system which helps to assist and recruits the others to help them. There were many people who are associated with the Ponzi and the Pyramid scheme. The structure of the Ponzi can generally be associated as a triangular structure. As the schemer sits at the top and increase the step of the investors. Generally, Ponzi scheme is the initial investments which are demanded from the investors are usually high. The reason for it is that the company does not have any independent source for the income and use the money for its daily operations for the payment of the promoters’ profit. It also enables the returns to promise the investors. The victims of the Ponzi scheme are the major investors in the fraud. These schemes are often involved with the products which are overprices as well as no value for resale. The investors need to think the true value of the investment before making any investment (Nolasco et al. 2013).

Ponzi scheme and Pyramid scheme are the two types of white-collar schemes which enables when a criminal of high reputation. Both the term is use interchangeably as a evidence. They take the money from the new investors and pay the earnings to the exit investors. On the other hand both the schemes takes the account that they money were not got invested as the scheme eventually collapses and the new investors lose their investment. Both the scheme has similar character and they are often mistaken (Cortés et al. 2016). They share the same basic structure. In a single word it can be said that these two schemes are the two securities fraud. Both the scheme fooled the new investors through the promise of proving extraordinary benefits of return from it. Both sustain as long as the expansion in the number of investors occurs. Both the schemes are self sustained through the cash flows which can be matched by the monetary inflows. Both the scheme is related to fraudulent investment scheme. Both promise in some return on the capital of investment which is unrealistic in approach. Both are on one way same as both the scheme depends on the new investors to satisfy the obligations to the existing investors. Both the scheme are insolvent as well as both are against the law. Ponzi as well as Pyramid scheme are involved in the misrepresentation in the nature of the investment. Though in some places Pyramid scheme does not involved in misrepresentation (Keep and J. Vander 2014).

Reasons For the White-Collar Criminals to Carry out the Scheme for Longer Period

                 

Figure 1: Ponzi scheme in America

Source: (Planetponzi.com 2016)

Ponzi and Pyramid scheme both look similar from the ground but, if someone goes down in the deep there are many differences which can be found in the operations purpose.  The main difference lies is that the executor of the Ponzi scheme suggests the individual to invest in places which have a return available the average. While the other Pyramid scheme which is hard to defect. Pyramid scheme collapses faster as it requires the more of the participants for its sustention. On the other hand a close look will give a view that Ponzi scheme require its survival through the influencing the existing members to reinvest the money with small quantity of new members (Deason et al. 2015). The investors of Ponzi scheme like C. Philpi Elliot, Charles Ponzi, David Ponzi and etc believed that the fraudulent promoters developed a system which is making the money in generation with the extraordinary investments returns. While, the members who invested in the Pyramid Scheme like the “chain letters” knew that the profits came from the contributions which were made from the investors. Both the scheme of scams has differences in the structure. The pyramid Scheme works in a way of top-down manner and it involves a numerous levels of the investors. While the Ponzi scheme has a structure which consist of the involvement of the more circular structure which has which revolves around the executor of the scam along with the view that all the investors are equal and have unlawful footing. As been discussed both does not support an unsupportable business model rather both support the activities which are illegal. The execution OF any of the scheme will lead to heavy fine and in some instance it can also make sentences on prison. Both the scheme enables to damage the customers as well as the financial industry (Cox 2014).

Figure2: Pyramid scheme

Source: (HowStuffWorks 2008).

Investors in the Ponzi scheme believe in the purchasing of the security and often they were unaware about the involvement in the Ponzi scheme. While in contrast the Ponzi scheme operates more transparently and here investors understand the process of recruitment through the responsibility as well as the source of revenue of the existing members. While the involvement after the initial investment is much lesser in the Ponzi scheme. The Pyramid Scheme offers the opportunity on the individual which require making the money through effort (Frankel 2012). Generally it is a type of investment or the business or the opportunity in the product. An initial member sells or recruits the other participants and the person who recruits the other get a financial reward. After, the initial involvement of the members of the Ponzi schemes does not actively participated in the scheme. While the Pyramid Scheme requires the active involvement of the existing participants as the existing members requires recruiting the new participants in the contribution of the scheme.  In both the scheme the existing members are the contributors for the new investment. The participant’s further believes that they are earning from the returns of the investment. while on the other hand the Pyramid scheme enables the participants to aware about the earning of the money by the recruitment of the new participants. The Ponzi scheme also takes many years to collapse if they are sufficient in the members. Providing an example a close looks on Bernie Madoof suggest the longevity as it was present for more than 30 years. While the scheme of Pyramid collapses because of the growth and the required sustainability that is required (Basu 2014). 

The overview gives the fact that the Pyramid scheme is a explicit one. As from the initial stage the participants are aware about the fact that they are investing their money for the opportunity to get other to pay back the money (Banks 2013). While in the Ponzi scheme the necessary steps relies on the participants as it makes the transfer of the money through the illegal investment of the business. Though, both share a number of opportunities where they fooled the investors through the promise of extraordinary investment. Both can sustain as long as cash flows does matched with the monetary inflows. The important factors that need to consider are the scam part for both the scheme is the originator of the corruption of business practice and not the participants. While, the pyramid scheme differs in the multi-level marketing scheme from Ponzi scheme as it offers the legitimate products (Banks and Torres 2012).

Bernard L. Madoff has the longest survival report comparing with the others; he survived for more than 30 years. The idea to pull the scheme of Ponzi is not considered feasible. The reason for such longevity is because of his reputation and respect for being as the market genius. Bernard Madoff is a successful as well as legitimate businessman. Madoff convinced a huge number of investors in their savings for their false promise and the consistent return from their profits. The other reason for its longevity is because of his well versed as well as active membership in the financial industry (Lewis 2013). Madoff seemed to be a person who is trustworthy and promised a return of 10 to 12 percent which attract a number of investors. Most of his clients are affluent and stable with a giving a constant rate of return. The clients are most of the time attracted for the stability and the consistency in the rate of return. They mostly think that it would be beneficial for them if they invest in the ambience which has a constant rate of the return. The strategy of Madoff further illustrated as they buy the stocks and trade the stocks in a way to decrease the stock. The effective timing strategy which he adopted is known as split-strike conversion (Ferrell and Ferrell 2014). His further strategy also enhances his profit through the policy of drawing the new clients. He developed the relationships through the intermediaries. These intermediaries enable the profit through the receiver of the fees and ensuring Madoff with a money flow in the operation. Further, Madoff used to initiate the “black box” model which enables when to buy and at what point they need to sell. He was one of the active traders of the market. Align with that the returns in the trades which are short-term are operates through ordinary income. It made attractive to the tax free institutions like the hospitals, foundations and the religious groups (O’Halloran et al. 2014).

This money which Madoff earned is mostly deposited in the banks and he usually used to move his money between Chase Manhattan bank of New York and the Madoff Securities International Ltd which is a UK Corporation. The strategy which was made by Madoff was appreciable as it made him to continue the service more than 30 years. No other persons stayed in the industry the way he was in the market. This made the Securities and the Exchange commission highly criticized for unable to detect the fraud (Donoho et al. 2015).

           

Figure 3: Bernard L. Madoff

Source: (Blackden 2010).

The reason for such long time of rule is many. Madoff offered the investors to have low risk and high return. There were no investment firms who were able to come closer comparing with the performance of the investment of Madoff. Investors generally accept the tradeoffs which are subjected to the scale of returns and in response accept the high return in the generation of the high risk. In both the time when the ups and down the investment which was made by Madoff has made the firm return with the constant rate (Stolowy et al. 2014). The strategy of Madoff in terms of finance has made more compact strategy even from the Ponzi scheme. Though there are even are reasons which support accuse of eventual downfall of the Madoff the economic down of the generated in the redemptions than the firm.  Madoff attracts numerous investors in the promise of the high returns in low fees. Such strategy becomes more obvious from the one of the predominant fund of Madoff the Fairfield Sentry fund which reported to have $7.3 billion in the assets of October and they claim threat they paid more than 11 percent of the interest in every year. Madoff also initiates million of dollars from showing the money that got invested in the hospitals and the theatres. The success of Madoff further, initiates through the interest in philanthropy which was handled by him showing as a family enterprise. The most important questions which dwell in between is that the Madoff’s far-reaching, long-running fraud activity which got out of the track from investigation departments for years (Lewis 2012).

The effective strategy of Madoff made him to sustain for so long. His strategy which he adopted made him to stand and enabled it to take an advantage over his competitors. His effective and eventful plans made him to serve for more than 3o years. Until the year of 1990 Madoff success could not be legitimate (Hornuf and Haas 2014). In 1995 he was sent in the US Securities and Exchange Commission and was released after two years because of lack of evidence. This shows the effectively of plan which made him to found no evidence against time. Even the US investment bank concludes that the profit that Madoff made was really good. The conclusion on Madoff will lie in a way that the success of Madoff for his longevity lies with some important points. Wealthy families used to place their money along with the wealth mangers and the hedge funds along with the private banks. They used choose a professions who could be act as a specialist fund managers. And, as of choice they use to take Madoff. The popularity of Madoff leads to the specialist fund which is raised by the money to nourish openly into Madoff in revisit for a charge (Schnader et al. 2015).

Ponzi scheme and Pyramid scheme are the two schemes which are two type of crime of high repute. It takes money from the new investors and distributes it among the new investors. The emergency to stop such frauds need to be handle as soon as possible. They need to monitor the system which works in a well mannered through the real-time and the point-of-sale. To evaluate it a fraud response plan need to be responded. The board needs to establish for the maintenance of the honest open as well as well intentioned ambience of the organization. Due to the diligence efforts of the actions the prevention should be made so to forbid it from such destruction. The investor’s awareness should also be high along with the actions on enforcement. The investors can avoid the investment frauds like Ponzi and pyramid through showing some consciousness (Djordjevic and ÄÂukić 2016).

The investors need to check the investment advisors thoroughly. They need to manage the money and scrutinize before investing with the hedge fund operators along with the private fund equity. They give a check before the operations with the individuals or the entity that need to be entrusted with the investor’s earned investment fund. The given study suggested that Ponzi scheme have accusation on fraud and the criminal record. While, it is also been observed that others have not yet registered with any of the regulatory body. The SEC requires the representatives on the investment advisor along with the investment advisor firms so to register through the filling of the “Independent Advisor Public Disclose or ADV form. The investors need to check the background before investing. They could give a close look on the selection of the credentials, history of the employees, educational background and the check of the civil and criminal record. The above discussion in the above has shown that the Ponzi scheme has makes a induction of the prospective investors which includes a promise of higher return in the market with extraordinary return. The investment programs which deliver the higher rate than that of market need to check before the investors could indulge themselves in the involvement. The Securities and Exchange Commission or SEC was established to protect the investors from the misrepresentation of the fraud as well as the sale of the securities. The SEC does not involve into the enforcement of the law. All the securities are not registered with SEC. an individual can help through notifying the SEC if they are approaching in the participation of the investment scheme (Rajapakse and Malaba 2015).  

Figure 4: Securities and Exchange Commission

Source: (Ilascu 2016)

The primary responsibility in response with the prevention as well as detection of the fraud should charge through the governance of the entity as well as the management. It is also important for the management and the Government to place a strong emphasis on the preventions of the fraud. This would enable to commit the reduction of the opportunities of the fraud and would persuade the individual because of the fear of the detection and the punishment. Strong control has become more essential for saving the new investors from the frauds. The through research would enable to forbid the risk and the fraud attached with it. It should involve in the investing of the new enterprise of commerce which consists of no assets and has established for the loan funds for the development of the projects. It need to be checked through the careful examination of the loan documents as well as the offer statements for the determination of the security of the loan and any collateral pledged include with the investors (Dimmock and Gerken 2012).

The above discussion gives the overview through which the establishment of the Ponzi as well as the Pyramid schemes would be forbidden. The scam need to be handled in a proper way. It is not only the responsibility of any particular individual. It needs to get checked from all forces. The law and regulation body need to be stricter so that the establishment could be checked. Secondly, the new investors before inventing need to check in details about the plans and take necessary steps about the individual (Djordjevic and ÄÂukić 2016).

Conclusion

The scams on the Ponzi as well as the Pyramid which are involved in the white-collar criminal activity enable them to establish as a trustworthy as well as respectable figure. Though, most of the followers of  Ponzi scheme like Bernard Madoff are educated and a experienced individual in terms of power, respect, trust and responsibility. Even the fraudsters of the Pyramid scheme use promises and extended dishonesty in their approach of the scams. Though, most of the rimes these kinds of scams often collapse quickly because of unstable nature. Though, the case of Bernard Madoff is exceptional to consider. Now, proper measures need to take to forbid the operations and the establishment of such scams. The growth of such need engraves from the grass level through proper measures and the more consciousness and evaluation in parts of new investors. 

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