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THINKING ALOUD (BusinessLaw) BUSINESS ETHICS: Ponzi Schemes & their look-alikes

Updated on December 30, 2015

“Relying on the import of money, workers, and brains,” America is “a Ponzi scheme that works.”

— Michael Lind: New America Foundation, a think-tank.
A Ponzi Scheme structure
A Ponzi Scheme structure | Source

Chén Róng’s

Little English-Chinese Dictionary

  • a house of cards = zhǐ pái dā fángzi (bù kě kào de )
  • Frankenstein monsters = bù néng bèi kòng zhì de guài wu
  • turn a blind eye = shì ér bù jiàn
  • muddy water does make it a lot easier to catch fish = hún shuǐ mō yú
  • The fall guy = yì shòu hài zhě
  • Smart aleck= zhāng yáng zì wǒ de rén


The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.

Diecast Model Mercedes SKK
Diecast Model Mercedes SKK | Source
Diecast Model Mercedes SKK
Diecast Model Mercedes SKK | Source

Surviving the disease of Fraud

A Prognosis by chenrong

The Mercedes SKK built between 1928 and 1932, was regarded as the fastest car in those times. Only forty units were manufactured and these mascots were admired for their performance, coming out tops at many racing events.

How much would this vintage fetch at today's auctions? US$10 million is not an unthinkable sum of money to ask for since a Ferrari 250LM was sold for a record price of US$14 million just last month. Besides, people with lots of money will want to have a Mercedes classic car in the front porch of their garden home. It is a status symbol. Bonhams have recently reported that their annual auctions are bringing in earnings in excess of US$1 billion each year. It is no surprise. But when the stakes are high, they attract the attention of sophisticated forgers.

All fraud schemes are put in place because lots of money can be made. It is a common feature with all Ponzi-schemes, cons and counterfeits that can be classified under the same family of frauds. It makes it worthwhile to perfect the game in an organised manner. Fraudsters construct good infrastructure to match the real thing that even the experts would not notice the subtle difference between an authentic vintage Mercedes SKK and a fake. Every single detail -- from buying up old screws to reproducing frames and have them weathered down -- all done with precision so well that authenticators evaluating welding joints and testing the metal chemically cannot find fault with the counterfeits. The buyer of fakes has more problems than just losing lots of good money in his kitty. Caught unawares, he might attempt to sell the fake as the real thing with undesirable consequences to his own credibility. All Ponzi-like structures have been constructed along the same confidence-building techniques, the difference lies more in the manner they get carried out to suit the circumstances of the schemes.

There is one lesser known factor that works to the advantage of Ponzi-investment schemes, and the good guys get caught unawares. This is the informational cascade factor. Its negative effect has prompted some countries to enact laws aiming at neutralizing them. In the writer's own country, a similar psychological trend is prevalent and it is called herd instinct. In the arena of investments, people coming together tend to make investment decisions based almost on what others are doing because ‘blind’ followers are afraid of missing out on a good deal. They simply ignore their own private information signals and better judgements. Hence, when promoters of investment real estate from far-off countries came to market Get-rich-Quick investment schemes, many unhesitating locals handed over hard cash to them at seminars.

Who are these leading players that started the process of informational cascading or creating herd instinct in locals? They are locals themselves. They are different in that they are investors who are savvy but with less thoughts on scruple. They play highly risky schemes to make a quick profit and then disappear out of sight. In real estate sales, they buy the most sought-after residential or commercial units from a plan and sell (or flip) it to another buyer for a quick profit. These lead players have first mover advantage when the property market is churned and red hot. They are aware their fellow countrymen are well into playing the game of flipping local properties before temporary occupation licences (or TOP) issued by the housing authority. But these lead players -- some could be agents planted as ploys -- know the whole game of foreign real estate sale may be a fraudulent scheme and, therefore, they are quick to off-load their properties before the bandwagon crashes. In other Ponzi schemes, existing investors will get their returns from new capital paid by new investors; the early movers do not get themselves burnt if they take their principal and interests out of the scheme quickly enough. It is a high risk attempt. But there are people who make a living developing such skills and benefiting from others who are psychological infirm and imprudent in action.

On Singapore's roads at least, have you not seen opportunistic drivers who were quick on their pedals revving up their engines when they caught sight of an approaching ambulance blasting its siren for right of free passage? At first opportunity, these opportunistic drivers would promptly close-in and race behind the ambulance, taking advantage of other road users who had to slow down giving way to the ambulance carrying people in pain. Generally law abiding people who are less skillful on the road under similar circumstances may crash their vehicle if they try to follow the act of an opportunistic driver.

Never act on impulse!



Ponzi Schemes & their look-alikes

Writer: Chén Róng

Michael Lind was speaking in jest. His ponzi scheme ends with a happy American dream. This article talks about real Ponzi-style schemes.

• Big-time corporate frauds

Most businesses in developed economies do work to a quite high ethical standard. Unfortunately, there are still many with ethical problems. Their corporate methodologies are unorthodox and oftentimes bordering on the unsavoury. Some obvious vices are dishonesty, deception and engaging in near Ponzi-style schemes to the disadvantage of savers and investors seeking high returns.

True Ponzi schemes are big-time frauds. They are a phenomenon of boom times in world economies. But when economic fortunes falter and fall like a house of cards, people want their money back and the moment of truth arrives. The Ponzi fraud comes to light. The scam was named after Charles Ponzi, a swindler in Boston who first orchestrated a scam in 1919 by paying early investors using the investments of later investors.

When asset bubbles are rising during good times, all kinds of Frankenstein monsters come to life prowling the world of finance. Ponzi schemes can only pay out the present group of investors by taking money from future ones. These schemes are kept alive by a deluge of funds out there in the marketplace looking for money making opportunities. Owners of these funds will risk their money in get-rich-quick schemes to buy themselves that dream car or lakeside holiday home. One unintended outcome: some of them either do not know or simply turn a blind eye that what they are putting their money into is, in fact dubious investment schemes.

• Legitimate business turned Ponzi fraud

At the present moment, some parts of India is in the grips of a massive Ponzi scam – unregulated ones together with regulated chit fund companies but subsequently gone bust. Chit funds offer interest rates as high as 50 per cent, while banks at best offer 9 per cent. The funds are dependent on the steady flow of money from investors and these fund pools are prone to collapse if there is a liquidity squeeze and funds suddenly stop coming in. The regulated chit funds with the necessary capital for liquidity are highly successful. One such company – the Shriam Capital - operates in four southern states and having disbursed over 500 billion rupees to subscribers over the past 40 years.

The fact that the Chit Fund industry is a legal business in India does not help its people. Ordinary citizens who form the majority of investors generally cannot see the wood for the trees, in their rush to plough their savings in to the jungle of chit fund companies – both regulated and unregulated ones. The general investment public is not able to distinguish the genuine chit fund companies from the fraudulent ones; or one which starts off as genuine but change its business into a scam when finances dry up during a financial crisis.

Apart from the Chit Fund industry, there are other instances of similar scams. In one recent case infamously known as the Boron CLS Bond lubricant products, a company, which had more than 100 people in its employ, engaged in an alleged sham investment scheme that cheated nearly 100 individuals. This scheme was hatched because of losses in the land investment business and new funds were urgently needed to salvage a corporate sinking ship during the 2008 financial crisis. We will not get into the details. The point is: People got cheated because the Boron owners started off in a genuine business and later initiated the alleged scam to raise new money. They probably thought money raised would provide the relief so badly needed; and once the company could get back on its feet, the perpetrators would steer the company once again on the path of righteousness. No matter what the endgame may be – the action taken was unethical.

• Legitimate fund raising smells of Ponzi fraud?

Corporations raised their funds through legitimate channels such as collective investment schemes, non-convertible debentures and preference shares. Investors have to be discerning when filtering such investment minefields. At current benchmark interest rates nearing zero, investors are demanding for relatively higher yields on their investments. A few private equity firms are seen taking advantage of the situation to raise dividend loans through companies they own; dividend transactions made payable to owners benefit mainly themselves as major shareholders. Dividend loans do not add value to companies. On the contrary raising debt and increased leverage without enlarging the asset base supporting the debt will severely weaken corporate balance sheets. In the short term, share prices may run up because of higher dividend pay-out; and private equity firms will sell out to the next round of investors caught unawares because of positive investment sentiments of a bull market. Because such financial tactics are done legitimately, nobody would look at them as investment scams and this article is not suggesting that they are Ponzi frauds per se; but beware and be warned!

Investors need to know that all Ponzi-style fund pools can only pay out the present generation of investors by taking money from a new group. We all know the old English saying” If it acts like a duck and quakes like a duck, it is a duck.” Investors should stay alert to avoid fingers burnt for lack of due diligence. Unfortunately, it does not help that regulators did not insist that corporations raising funds should put forward a simple one-page summary of financial statements and the potential risks and rewards expected from the funding exercise. Investors generally have to go grasping through huge volumes of literature; complex sentences filled with financial jargon professional analysts find difficult to understand. Reference to an old Chinese proverb may be relevant here: muddy water does make it a lot easier to catch fish. In other words, opacity creates opportunities to make quick money. For this reason, investors should avoid putting money into such corporations; and if they are adamant on investing, listening in on twitter-conversations or reading analyst-blogs may offer some help, but it is no guarantee for safety.

Nevertheless, not all similar schemes border on Ponzi frauds. By staying vigilant investors will be alerted with an inquiring mind to separate the good apples from bad ones. Recently, technology behemoth Apple raised US$17billion in bond sale at relatively low interest rate to increase dividend pay-out but it is not to be construed as near Ponzi fraud. The opposite holds true: Apple actually rewarded loyal shareholders with a substantial return of cash by avoiding a potentially big tax bill had it use its huge offshore reserves. It was a clever tax planning which, perhaps, created another problem with the taxman. That is a different story. Apple, the maker of iPhones, iPads and Macs, has the wherewithal to innovate and deliver shareholder value in the near to long term. By taking on debt, Apple can improve stock performance and magnify investment returns for happy shareholders. The taxman frowns on the scheme.

• Why do people fall into the traps of these get-rich-quick schemes?

Naiveté is probably one reason. Inexperience and a lack of an uncritical mind may lead some to make less-than-wise decisions.

Another reason is the presence of gambling tendencies and personality traits associated with risk taking. At the back of such people’s minds is the notion that a scam may be lurking, but they did not care. Since gain is big, self-denial will see them engage in this game of chance and sometimes, roping in friends so that they are not alone in gaming. There are yet people holding mundane jobs that do not pay well. Gambling provides them with a hope that one day they could win big and rid themselves off the grips of poverty.

Another probable reason is: knowingly participate in such an investment scheme. Doubts still exist if financial institutions, with all their highly qualified executives, have not the slightest idea that Bernard Madoff’s hedge funds are Ponzi schemes. Did these institutions choose to ride on with the good times while it lasted? The truth is: no wealth management product has consistently produced double-digit returns for their clients for long periods. So counting on Madoff’s Bernard’s hedge fund, Ascot Partners, and its purported secret trading system to help operate a wealth management system with double digit returns is not such a bad idea. In any Ponzi scheme, if you get in early and you know when to get out before the bubble bursts, you can make plenty of money. The moral of the story: The ordinary guy; the man in the street; the small business people, invariably are always victims.

Human greed is probably the most important reason why people are the fall guy for fraud. Greed is not a crime. But when greed is set free of its rein, the result may be complete devastation following a great Ponzi-bubble burst. No single discipline can help to understand the complexity of human behavior. When greed pays off with a handsome gain, Smart Aleck will most likely point his finger inward to show the world how investment savvy he has been. If things go wryly wrong, he would point his finger at the government for not doing a good governance job. In all fairness, no amount of rules and regulations can create a world fraud never happens again. Ponzi rabbits will always find new holes to burrow through. The old English saying has this piece advice for us: If it is too good to be true, it probably is not true. People have to be prudent and wary about investment opportunities.

• The Greed Philosophy

In my early teen – an age of ignorance – I asked my mother if she thought monks really possess extra-ordinary power of insight; an inept ability to see through veils of deception. Many people seemed to think that monks had that godly power during those epoch days. Mom’s answer was atypical; it was out of sync with a regular believer. She said philosophically: “Monks forsake their families for the monastery; they are generally more benevolent; devoid of greed. This lack of self-interest is probably their greatest gift and it may not have come from God. We, too, could probably work ourselves to deserving of this gift if we try hard enough no matter how difficult it may be. Chances are, if we succeed, that ‘little monk’ inside us will always be there to guide us against unwholesome greed.”

Recently, on a holiday trip up Lushan – a mountain range in China – I was humbled by what I saw as a new lesson on life from a poor village family. Made-shift stores were manned by Lushan villagers selling old coins and home-made memorabilia. There was this store manned by a young housewife as she busy multi-tasked between attending to customers and keeping an eye on her young children; one was still cuddling in her arms. One kind-hearted holiday-maker presented a ten yuan currency note to one of her young sons. The token sum was intended as a gift. Unhesitatingly, the village-lady instructed her young son not to accept it. She thanked the giver for his generosity, nevertheless. It was only when the holiday-maker decided on buying an item with the money that the village lady smilingly accepted the ten Yuan note as her sale proceed. Greed is a negative personal trait. When greed rears its hideous head, the greedy may be rich or poor, educated or illiterate. In the 1970s, airlines reported on frequent stealing of silverware cutlery knives, forks and spoons by passengers in first class cabins. When caught red-handed by the crew, elite passengers conveniently dismissed the criminal act as a minor misstep as they were desirous of keeping the cutlery sets as souvenirs!

In April 2009, my wife and I spent a short vacation in Chengdu which is the capital of Sichuan, a province in Southwest China. On arrival, we board a taxi for our journey to the hotel. The driver misunderstood our travel instruction because we were not speaking Chinese with a local accent. The taxi-driver got us to the wrong destination but he insisted on waiving the extra fare acknowledging it was his fault that my wife and I were delayed by the re-routing. Human nature is such that people tend to look at others with tinted glasses. Unfortunately, the smart-looking trickster understands this human weakness too well. He dresses well; stayed in six-star hotels, and flew in by private jets; a flaunt of wealth that easily melt away any suspicion of scam. Things do get a lot easier when local officials openly endorsing the Ponzi scheme because of their own private agenda.

• Changing of Value System

In today’s world, few would pay heed to the teachings of Chinese philosopher Lao Tzu who preached that there is no greater human disaster than greed itself. The relentless pursuit of money, wealth and power and, a more deadly sin, the taking away of things that is not rightfully their own are considered contemptible greed. Most would silently laugh at his dated views. People gained respect because of their wealth and few would question how they may have gotten rich and accepting explanation for an early retirement to spend more time with their families; and socializing and networking in private clubs.

With harder economic times, governments have new ideas. Plans are abreast to build newer and better casinos. Previously unlawful gaming habits are made legal as a way to fight against unorganized and unregulated gambling. The jobless are to be encouraged to embrace risks, telling them failed ventures and bankruptcies are not failure in life. Opening up to rich emigrants to drive domestic economies when demand for goods and services seem to wane. All these messages are in conflict with Lao Tzu philosophy, making it hard to persuade people to stay vigilant and not fall prey to Ponzi-style investment scams. Just last week, I was told of someone– a vice president in a multinational company – who has fallen victim to a phone scam. He transferred a sum of over a million dollars to a Chinese lady whom he befriended over the internet and with whom he exchanged phone conversations for some months. A distraught sister who lent him some $300,000 related the story to my wife. The brother seemed mesmerized by the event and still hope to borrow and remit new funds to unlock a bank account stashed with hundreds of millions; but for a banking technically, the funds could be made available at short notice. Why would an educated man choose to believe in such a tall story? Has not he read in the local news of well-publicised Nigerian scams which promised a share of some lost fortune sequestered in obscure bank accounts but never delivered?

In a society where money takes priority over all things, the new motto seems to be: In Greed we trust.


---- E N D -----

Hubpages do not support words written in the Chinese Language. Readers can get a free online English-Chinese translation from GOOGLE TRANSLATE OR

I have also included ChénRóng’s Little English-Chinese Dictionary for a more precise translation of select English phrases from the article.



Writer: Chén Róng

Successful franchising stories are aplenty, and these are narratives often lauded by trade magazines. The writer has in mind for discussion is the less-talk- about ones -- the franchising scams. These are experiences that people feel too ashamed to talk about openly because these are considered taboos in some culture; or victims who are too broken-hearted even to mention them. But such stories will be more prevalent when good jobs are hard to come by and even micro businesses are considering trying their hands at franchising to expand into related activities as competition keeps tearing down profit margins.

Franchising scams exist in part due to a weak regulatory environment in some countries. However, people who get scammed are usually those who do not do their home-work, or in commercial parlance -- business due diligence. People who want to get into franchising as a business model has to bear in mind that only their own discerning selves could protect themselves from falling victim to a well-crafted scam. Nevertheless, there are always tell-tale signs a prospective franchiser can discern even in a well-laid scheme, if he exercises care and diligence.

Now, exercising due diligence is not just discussing your business plan with your best friends and associates. Chances are, they may just say all things nice, sensing your keen interest in getting into a particular business. The right person to talk matters over is a franchise lawyer. The writer is not a franchise lawyer and he will not pretend to be one. He will certainly consult a franchise lawyer when crossing that bridge, and he will not just consult any lawyer friend.

But before the writer even spends time and money engaging the services of a lawyer, there are things that his training and corporate experience would cause him to ponder like every prospective franchisee basically should. A business that has no proven track-record of success cannot possibly franchise itself legitimately. An offer of an attractively low franchise capital raises a doubt instead of an attractive proposition.

Another obvious question is: why does the franchisor so easily trusts someone with his brand and business model -- a person who has little or no experience with related-business activities of the intended franchise. If you are that someone, and the franchisor seems only interested that you are able to raise the initial capital and pay him his initial asking fee, the writer thinks the scheme is likely a red herring.

While expanding through wholly owned operations will cost a franchisor a lot more capital than franchising, the hard and soft cost - both at the start of the franchise and on a continuing basis - can be significant. The selection process for suitable franchisees has to be stringent and elaborate. This process is like a couple going through a courtship period, both parties will have every possibility to call off further engagement if one or both think a happy marriage is not to be. If a franchisor pushes hard to conclude the contract instead of offering a reasonable period for mutual engagement, chances are, the business proposal is a sham franchise.

The result of a study by a renowned Australian university showed that nine per cent of franchisees did not understand the terms of their franchise agreement. They also had vague ideas on other related disclosure documents and their requirements, but they still went ahead and purchased the franchise.

The disclosure document should show:

  • Relevant business experience of the franchisor,
  • details of current and past franchisees
  • Franchisee’s costs to start the business and other fees payable under the franchise.
  • A genuine franchisor will also provide details of certain legal proceedings against him or his director(s) instead of assuming an attitude of buyer beware in his dealing with prospective franchisees.
  • Financial statements including a declaration that on reasonable grounds, the franchisor believes he is able to pay its debts; and
  • Financial Reports for the past two financial years, supported by an independent audit.

The documentation should include details on what actions the parties must undertake at the end of the franchise contract. It should mention whether or not the franchisee has an option to renew or sell the business, and whether there are further obligations that may be imposed on the franchisee. If the franchisor has a history of selling an existing franchise back to his franchisee, in ways similar to McDonald's, a prospective franchisee may be hitting the bull eye, if he passes the stringent test imposed on him. In Singapore, retailer Fairprice offers entrepreneurs the opportunity to take over Cheers-brand convenience stores, and run them as their own franchised business. These are fully stocked stores that have been profitably in operation for at least a year. The risk is minimal but not every Tom, Dick and Harry can qualify to run these tried and tested outfits.

Once again, the writer's opinion is: seek legal counsel. Prospective franchisees should do your own basic due diligence and hire a professional to look over all franchise documentation, rules, regulations and so on. This is to ensure that the business opportunity offered is properly and legally crafted a fit for you as a business model. Insofar as the franchisee is concerned, the franchise contract is legally binding. He commits good money in terms of front-end fees, and expects that the franchisor does honour his contractual obligations. But unfortunately, when the rooster comes home to roost, the franchisee cannot depend on the signed contract. To recover bad money for reason that the contract is a sham, it would only mean, he has to incur additional financial cost which is not recoverable an expense.



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