Written Report

Introduction

Investment scams are common nowadays. It usually involves getting you to put up money for a
questionable investment – or one that doesn’t exist at all. In most cases, you’ll lose some or all of your
money. Most investment scams use the same basic principles: promises of great profit, assurances of
no risk and assertions of urgency and secrecy. The con artist is likable, friendly and professional. There
are different types of investment scams- Pyramid and Ponzi Schemes, Pump-and-Dump, Advanced Fee
Fraud and Offshore Scams.

Discussion

The most common among these types is the pyramid scheme. The main characteristic of a
pyramid scheme is the participants only make money by recruiting more members. There are many
different kinds of pyramid schemes, but the two most basic are product-based and so-called naked
pyramid schemes.

This how a naked pyramid scheme works:

a. One person recruits 5 other people to participate in a “no-fail investment opportunity”.

b. The 5 recruits each pay the recruiter $100, for example.
c. The recruiter tells them to go out and recruit 5 more people to do the same.
d. If each recruit is successful they will all end up with $900 in profit from a $100
investment.

This is the mathematical explanation why pyramid schemes grow exponentially:

 1 5-

2 25 -
1

125 -
3

625 -

Figure 1. Exponential growth of recruitments in a pyramid scheme

This proves how pyramid schemes grow exponentially because each recruit is required to recruit 5
people in order to make some profit out of their investment.

For example, there are five initial recruiters and each of them needs to recruit 5 people. Those 25 new
recruits will have to find 5 recruits each to make $900. That means they have to find 125 people willing
to sign up for the said program. And if they somehow find 125 people, the next level of the pyramid will
need to sign up 625 to make a profit. Eventually, there won’t be enough recruits at the bottom of the
pyramid to support the level above it. That’s when the pyramid topples and everyone at the bottom
loses their investment.

As you go down the bottom of the pyramid scheme, each level has a tremendous increase of new
recruits who have to recruit more people in order to make money. This is where all the recruits lost their
investments and fail to make profits because they have to recruit a lot of people to make profits.

Ponzi scheme is an investment arrangement in which investors are promised low risk and high return.
The scam is named after Charles Ponzi, a 1920s-era con criminal who persuaded thousands to invest in a
complex price arbitrage scheme involving postage stamps. Pump-and-Dump in which a fraudster
deliberately buys shares of a very low-priced stock of a small, thinly traded company and then spreads
false information to drum up interest in the stock and increase its stock price. Advanced Fee Fraud
generally begins with an offer to pay you an enticingly high price for worthless stock in your portfolio. To
take the deal, you must send a fee in advance to pay for the service. But if you do so, you never see that
money—or any of the money from the deal—again. Offshore scams, from the word “offshore”, It means
it comes from another country and target U.S. investors.
Synthesis

There are different types of investment scams that are present nowadays. We don’t know that
we are already a victim of scams so we should be careful. Sometimes, the scammer encourages you to
buy shares in a company that they predict is about to increase in value. If that happens, we should be
cautious and consider first the 3 Cs, compare, consider and consult. Whenever an investment
salesperson presents an opportunity to you, before you buy, compare that investment to other
opportunities from other firms. So for instance, before you invest in a money market certificate at one
bank, compare the rates at two other banks. Never make a buying decision at the time of the sales pitch.
Always give yourself time to consider whether it is a good deal. While you are considering the
investment, consult with someone whose opinion you trust and find out what they think of the
investment.

References:

https://money.howstuffworks.com/personal-finance/financial-planning/investment-scams.htm

http://www.finra.org/investors/alerts/avoiding-investment-scams

https://youtu.be/W1Q3Fx9nWOk

https://youtu.be/MW5aDmQLqVY

https://www.atg.wa.gov/investment-scams