It is said that money is hard to earn and easier to lose. This is a harsh but universally accepted truth. When it comes to investing in the finance world one is like Aladdin without his magic lamp.
The best way to become wealthy is to fold it in half and keep it in your back pocket. Warren Buffet quotes that the rich invest in time and the poor invest in money. However, humans are greedy and there is a paucity of patience making it the best environment for the birth of swindlers and scam artists.
Let's learn about some of the worst financial scams in history.
It would only be fair to start with the person who coined a familiar term “PONZI
SCHEMES”. Yes! You guessed it right.
Charles Ponzi, the Italian swindler and scam artist. He promised his clients a 50% profit in 45 days or 100% profit in 90 days. He was like a genie and his clients were ecstatic.
But what was brewing behind the scenes? Let's have a look.
Ponzi came to the U.S. and worked odd jobs, none of which lasted long.
A Spanish company sent him a letter containing an “International Reply Coupon.” This gave him an idea- of a scheme that would earn his name a place in history. He started trading IRCs of one country and exchanged them for more expensive stamps in another country with the help of his agents. Some of the stamp sales made more than 400%.
He lured in Investors to make higher profits by promising them outrageous returns.
However, he paid investors using other investors’ money and pocketed the profits. This scheme came tumbling down after a year, when a man named Joseph Daniels filed a lawsuit against him on the basis of an old debt leading to an investigation by postal and legal authorities. The tides had turned and the scheme collapsed, half a dozen banks crashed and cost his investors $20 million.
In recent times history repeated itself, as a well-respected financier - Bernie Madoff - convinced thousands of investors to hand over their savings. Madoff was inspired by Charles Ponzi. He managed to go undetected for decades with his Ponzi scheme.
Madoff's company specialised in “penny stocks”, which are low priced shares that are traded on the “Over The Counter”(OTC) market. He was also the director of NASDAQ, which helped him cultivate relations with a group of wealthy and influential people, and eventually turning them into investors in his scheme. Their praises and positive comments helped attract an even larger pool of investors. Fee payments of the firm, fund pay-outs for the existing investors and his lifestyle were all provisioned by this. His downfall came in 2008 with the impact of The GreatRecession. The plummeting market caused a run on Madoff’s fund, as many of his investors wanted to redeem their “profits” at once. Unable to pay them he confessed to his sins. The investors contacted the SEC, whose internal investigation states that six substantive complaints over a 16-year period were received with no comprehensive investigation into Madoff’s firm.
It cost $65 billion to his 37,000 victims that ranged from prominent figures in business and media to hardworking, everyday people to non-profit charities. Many of them never fully recovered the money. In 2009, Madoff was sentenced to 150 years in federal prison.
Let’s now learn about one of the biggest scams that happened in India itself.
Over a three-year period, Harshad Mehta laundered over Rs 24,000 crore in the stock market.
Harshad Mehta was a well-known stock broker who allegedly manipulated the stock market in 1992 by drawing funds from banks, with worthless bank receipts. Subsequently, he used this liquidity to buy huge amounts of shares at a premium across many industries. These funds were then put selectively back into the market causing it to surge to over 4,500 points. His scheming was first exposed by veteran journalist- Sucheta Dalal, in April 1992.
These are just three large uncovered scams that have taken place. And there are many more, big and small, that may or may not have been caught. So next time you invest, make sure you’re investing with confidence!
Written By: Riya Shah
She is a 3rd year student at SLS, PDPU. A cheerful person to work with, she is curious and eager to dabble into everything, including the world of finance. She aspires to dive into the financial world, ride the highs and tackle the lows.
Edited By: Dhruvi Gathani
A 2nd year student at SLS, she simply cannot get over the beauty and complexity of numbers, economics and words. She has a way with words that ensures they reach the audience.
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