Introduction

Investment fraud is any scheme or deception relating to investments that affect a

person or company. Investment fraud includes illegal insider trading, fraudulent manipulation
of the stock market, and prime bank investment schemes. Insider trading, however, becomes
illegal when corporate insiders violate their companys confidentiality and secretly share or
sell private information to an outsider. The outsider will use the information not available to
the public to buy or sell shares of the company to make a decent amount of profit. Illegal
insider trading often happened in wash-trading, match-trading, and false prospectus. Wash
trading happens when an investor simultaneously buys and sells shares of the same company
through two different brokers. Wash trading is done to increase the activity of a stock in
hopes of producing the impression that something big is coming. Match trading, is similar to
wash trading, but usually a computer is used to pair-up shares of the same value to buy and
sell to increase stock activity. At the end of each fiscal year, companies produce a prospectus
for prospective buyers summarizing the companys goals, assets, debts, and financial risks to
help buyers decide whether or not they should invest in a company.
Sometimes companies produce false prospectus misrepresenting risks or losses to
influence potential shareholders to investigated pinpointed as the cause for the higher cost of
capital for securities issuers, thus lowering overall economic growth. Fraudulent
manipulation of the Stock Market occurs mainly when telemarketers or spammers use
persuasive techniques to paint pretty pictures of often-unprofitable investments over the
phone or through unsolicited emails. Most of these fraudsters add legitimacy to their pitches
by referring to investment counselors and using professionally designed brochures to pitch
the investment. Other types of Stock Market fraud include.

Case

Ponzi scheme is a fraudulent investing scam promising high rates of return with little
risk to investors. The Ponzi scheme generates returns for older investors by acquiring new
investors. This scam actually yields the promised returns to earlier investors, as long as there
are more new investors. These schemes usually collapse on themselves when the new
investments stop. Golden Traders Indonesia Syariah (GTIS), a Malaysian-based investment
company, has been accused of perpetrating a Ponzi-like fraud using its gold investment
scheme.
The investment scheme offered by GTIS is simple. A customer buys its gold at a higher than
normal price and he or she will receive a higher than normal return. Media reports say at least
two high profile figures, the chairman of the Peoples Representative Council and the
chairman of the Indonesian Ulema Council (MUI), have both endorsed GTIS investment
scheme.
Recently, GTIS customers grew restless after news spread of the disappearance of its
director together with a huge amount of companys fortunes. According to the head of the
Futures Exchange Supervisory Board (Bappebti), several investment companies in Indonesia
have been running similar schemes involving investment in gold. Experts say similar things
have happened in Malaysia, where several companies similar to GTIS have run gold
investment schemes and attracted many customers who then end up not receiving what they
have been promised (i.e. investment returns). Public suspicion of anything looking like a
get-rich-quick scheme is not without reason. Last year, for example, Koperasi Langit Biru
(KLB) made the news by defrauding its investors with investment packages that were no
more than robbing Paul to pay Peter schemes otherwise known as Ponzi schemes that pay
investors not from the return on their investments but from their own money and the money
of subsequent investors. GTIS has denied running an investment fraud scheme, since unlike
other fraudulent investment companies, its customers have received the gold they have
purchased. Nevertheless, there have been reports of late payments of promised returns to
GTIS customers, which indicate possible problems within the company. Whether GTIS
investment is really fraud has yet to be determined by the authorities investigation. However,
evidence suggests that just like the rest of the world, a market seems to still exist for Ponzi
schemes in Indonesia with many of the victims those who know almost nothing about
investment. More than a few of these victims are those who are supposedly smart enough to
realize that such investment schemes are nothing more than cons. No experts these days
know exactly why reasonable and educated people can still be victimized by a century old
Ponzi scheme.

Analysis

One hypothesis is that the temptation to become a millionaire in a short period of time
overwhelms their logic. In most if not all cases, a Ponzi scheme is not detected until it
collapses. In the GTIS case, many customers believed that since one of its websites contained
testimonies from two high profile figures, the companys activities must be legitimate. Also,
after expanding its business to Indonesia, the company has also received a halal certification
from the MUI as proof of compliance with Islamic laws. The certification was believed to be
a key factor in attracting customers in Indonesia. Anti-fraud experts believe that, based on
existing cases, to sustain a Ponzi-like investment, the number of investors (victims) need to
grow exponentially. For example, it is estimated that to sustain the scheme for six months, 64
investors are needed. To have it running for 16 months, over 65,000 investors are
needed. This explains the need for fraudulent investment companies to rapidly expand their
business to sustain its existence. In cases where there is a shortage of investors in the country,
they may choose to expand to other countries.
Evidence suggests that not all Ponzi investments began as such. Some started as
legitimate businesses. Bernie Madoff, a former non-executive chairman of the NASDAQ
stock market, was believed by many to have started out as a legitimate wealth manager but
then turned to fraud. One of the most common reasons why investment managers turn into
Ponzi fraudsters is to save their reputation after making investment mistakes. Generally,
Ponzi fraudsters are often seen as persuasive and charismatic individuals who are able to
influence others to do their bidding. To ensure that victims place emotion over logic,
fraudsters use social engineering methods to explain that, for example, many high profile
figures as well as companies have participated in their investment products.
Pressure is the motivation behind the crime and can be either personal financial
pressure, such as debt problems, or workplace debt problems, such as a shortfall in revenue.
The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes and
un-shareable with others who may be able to offer assistance. In this case of investment
fraud, the pressure of fraudster is the temptation to become a millionaire in a short period of
time overwhelms their logic. Then, the pressures in order the company to be exist so the
fraudster persuades more and more people to invest in GTIS. It is also the pressure from the
life style of investor who wants quick money to fulfill their needs. It can be caused of the
investor has luxury life style so that he/she needs much money without logical thinking then
he/she trust to invest easily.
Opportunity is the means by which the individual will defraud the organization. In
this stage the worker sees a clear course of action by which they can abuse their position to
solve the perceived un-shareable financial problem in a way that again, perceived by them is
unlikely to be discovered. In many cases the ability to solve the problem in secret is keys to
the perception of a viable opportunity. The opportunity here is that the fraudster persuades the
ordinary people who do not know anything about the investment to invest and give high
promise that the victim believes.
Rationalization is the final stage in the fraud triangle. This is a cognitive stage and
requires the fraudster to be able to justify the crime in a way that is acceptable to his or her
internal moral compass. Most fraudsters are first-time criminals and do not see themselves as
criminals, but rather a victim of circumstance. Rationalizations are often based on external
factors. In this case, the fraudster seemed like it is no problem to do this fraud because many
people do this, and there is no punishment for them.

Recommendation

There are many ways for investors to prevent themselves from being conned in such a
way. The first understanding is what fraudulent investment is in its various forms. Secondly,
always rely on logic over emotion. One need to understand, among other things, what is and
what is not a legitimate investment. For example, a scheme that offers a guaranteed higher
than normal return is almost certainly not a legitimate investment. A scheme that says it will
yield a higher than normal return but cannot be logically explained by its investment manager
is almost certain to be illegitimate. An investor needs to understand investments law of
nature the higher the return, the higher the risk. As evidenced by Ponzi fraud cases
worldwide, the support, endorsement and in some cases, the certification from high profile
private or government institutions are sometimes not enough to prove that investment is not a
scam or will not become a scam. The best defense is always keeping the awareness of fraud
identification and the common sense of investors. For the last recommendation, if the
investor really want to invest on something, it is better to consult with expert people on that
field to make sure that the investment is real and will not be victim of fraudulent. It is better if
the investors want to invest their money, they should learn the investment scheme of the
organization.