Asignment report business ethnics case 11 fraud of the century

Despite the fact that during the XX century almost all developed countries have adopted laws to combat fraudulent systems such as the Ponzi scheme, Pyramid scheme, these cases are not ju

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN

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ASIGNMENT REPORT: BUSINESS ETHNICS CASE 11: FRAUD OF THE CENTURY

Ha Noi – September 2022

Lecturer : Dr Nguyen Bich Ngoc

Student Name : Ta Minh Duc

Student ID : 11211424

Class : International Business Management 63C

Table Of Contents

I Introduction 3

II Pyramid scheme 4

1 What is pyramid scheme 4

2 What Is Multi-Level Marketing 4

3 Differences between a legitimate multi-level marketing company and a pyramid scheme 5

4 Pyramid scheme examples 5

III Ponzi scheme 7

1 What is Ponzi scheme 7

2 The original Ponzi schemer 7

3 The largest Ponzi scheme in history - Bernard L Madoff 8

4 Tom Petters 9

5 R Allen Stanford 10

IV Conclusion 11

1 The impact of Pyramid schemes and Ponzi schemes on society 11

2 How to avoid being defrauded 11

V Answering case’s questions 12

Question 1 12

Question 2 12

Question 3 12

VI References 13

2

I Introduction

Cheating is the basis of any scam And the deception, as if harmless it may be, is a hoax You can persuade people to give money And also you can make sure that the money will flow into your pocket, so that the people themselves will carry them to you and even be grateful that you've agreed to take them Despite the fact that during the XX century almost all developed countries have adopted laws to combat fraudulent systems such as the Ponzi scheme, Pyramid scheme, these cases are not just living, but even thriving They are happening all around us, and we often don’t even notice them Both the Pyramid scheme and Ponzi scheme are very harmful towards investors, and are hard to watch out for unless people know exactly what they are, why they fail, the effect

of the failure, common victims, how to avoid them, and how to prevent them from spreading More individuals are hurt than are helped when dealing with these scams Individuals should be more informed about pyramid schemes, because they can be easily disguised This case analyzes what Ponzi schemes and pyramid schemes are, their

differences and similarities, their detrimental impact on society as well

as how to prevent or avoid them

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II Pyramid scheme

A pyramid scheme is an illegal financial scam masquerading as a legitimate business Pyramid schemes are similar to Ponzi schemes and multi-level marketing (MLM) companies, but there are important distinctions among these three structures

1 What is a pyramid scheme?

 On the surface, a pyramid scheme appears to be a legitimate company selling products or services, sometimes they disguise themselves as MLMs but the core goal is always to grow the number of participants in the scheme rather than grow product sales New participants are typically referred to as investors, salespeople, agents or distributors, or some variation on these titles

 A pyramid scheme is a type of fraud where members make money by recruiting more people to buy in Typically, the founder invites an initial group of people to pay a fee to get in, in exchange for the ability to recruit more investors who will pay them These people are then encouraged to recruit others and receive part of the money those people invest while the founder also takes a share The pattern repeats for each group of new participants with money from new investors funneled to those who recruited them The scheme is called a "pyramid" because at each level, the number of investors increases exponentially and that’s also the reason why it's

impossible for pyramid schemes to function for long terms due to the limited number of people in the community When there is no more people to recruit, that's when the pyramid scheme collapses And another reason is that

as the pyramid grows, the returns get smaller and smaller until eventually there are no returns at all The only people who actually make money are just those on top of the pyramid, the others always end up losing their money

2 What Is Multi-Level Marketing?

Multi-level marketing (MLM) is a legal business program This business model involves the sale of actual goods or services by distributors or participants in the MLM Distributors get paid for those products and services of the MLM that they sell They can also receive income from sales made by distributors that they've recruited and from people those recruits then bring in

4

3 Differences between a legitimate multi-level marketing company and a pyramid scheme

 A legitimate multi-level marketing company emphasizes reliable products or services A pyramid scheme uses products or services to disguise its quest for collecting money from the investors on the bottom levels to pay other investors further up the pyramid

 In a typical pyramid scheme, new investors must pay a fee for the right to sell the products or services as well as for the right to recruit others into the pyramid for rewards unrelated to product sales or services Very often the products or services the victim must buy are unsalable, and the pyramid's promoters refuse to repurchase them On the other hand, legitimate multi-level marketing companies will buy back unsold merchandise, although often at a discount from the original price

 Success in multi-level marketing is based on two factors: product and service quality, and the hard work involved in being able to sell the products

or services Recruitment of new investors is secondary

4 Pyramid scheme examples

 Koscot Interplanery

The FTC began to take action against pyramid scheme in the 1970s, and one of its first action was taken against Koscot Interplanetary - a cosmetic company which recruit people for a fee, charged them for purchasing makeup supplies, and then provided them with a fees by recruiting others without encouraging them to sell any product

 Vemma Nutrition Company

Vemma Nutrition Company was a privately held multi-level

marketing company that sold dietary supplements In 2004, Vemma Nutrition offered an opportunity to earn full time income for part time work and this offer was open to everybody regardless of their experience or education All they have to do to start earning money is purchasing a $500-600 kit of their liquid nutrition products and invite 2 more people to do the same Vemma Nutrition grew quickly and became a global operation By 2013, while the company generated about $200 million dollars of annual revenue, the majority of participants earned less than they paid in

On August 21, 2015, the U.S Federal Trade Commission filed a lawsuit against Vemma, freezing the company's assets and seeking injunctive relief for consumer redress The FTC alleged that Vemma was a pyramid scheme; that Vemma had misrepresented participants' earning potential; and that the Boreyko family had inappropriately incorporated dozens of companies with the same staff, facilities, and commingled funding The restraining order was set to expire fourteen days later unless extended The company itself, CEO Benson Boreyko, and distributor Tom Alkazin were named as defendants

On September 18, 2015, the judge ruled that Vemma had been operating as a pyramid scheme and that their marketing material had been "deceptive and misleading" Accordingly, the judge appointed a monitor to oversee their business, and barred them from resuming normal operations

Penalty

In a September 2016 judgement, Vemma reached a settlement agreement with the FTC, wherein Vemma Nutrition Company, Vemma's CEO Benson Boreyko,

as well as Tom Alkazin and Alkazin's wife, Bethany, agreed to a permanent injunction and monetary penalties

Vemma Nutrition Company was ordered to pay a US$238 million fine as a company, restructure its compensation plan, and forfeit certain company assets The Alkazins, on the other hand, were fined US$6.7 million as individuals

As part of the settlement the defendants were banned "from involvement in any pyramid, Ponzi, or chain marketing schemes

 Arizona Internet Company Nex-Gen3000.com

In 2003, the FTC issued a press release declaring NextGen and other “internet shopping malls” to be pyramid schemes In this type of program, sellers were encouraged to purchase a package of goods and services to be resold on the internet The profit margin for sellers was low

According to the FTC, since 2000, Tucson, AZ-based NexGen3000 marketed Internet shopping malls it claimed would allow investors to earn income and commissions on products purchased through the Web Consumers paid a registration fee to join the NexGen program, and most also purchased a

“WebSuite” including the Internet mall and related goods and services, the FTC claimed Fees ranged from $185 for a “Basic WebSuite” to $555 for a “Power 6

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Pack WebSuite.” The complaint also alleges that most consumers lost money in the operation despite claims of substantial income The papers also state that the defendants provided deceptive marketing material to affiliates, thereby giving them the means to deceive others The FTC further claimed that the defendants failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid

The defendants, NexGen3000.com are barred from participating in any multi-level marketing businesses in the future The settlements include suspended judgments in the amount of $1,651,034

III Ponzi scheme

1 What is Ponzi scheme

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers The founder recruits investors by promising to pay consistently high returns that they can’t find in the market All the investors think that the return comes from a legitimate investment while the money was never invested The money that the investors receive as a return is just a portion taken from their original money

or from newer investors

2 The original Ponzi schemer

The term "Ponzi Scheme" was coined after a swindler named Charles Ponzi

in 1920 However, the first recorded instances of this sort of investment scam can be traced back to the mid-to-late 1800s, and were orchestrated by Adele Spitzeder in Germany and Sarah Howe in the United States

Charles Ponzi's original scheme in 1919 was focused on the US Postal Service The postal service, at that time, had developed international reply coupons that allowed a sender to pre-purchase postage and include it in their correspondence The receiver would take the coupon to a local post

office and exchange it for the priority airmail postage stamps needed to send a reply This type of exchange is known as an arbitrage, which is not

an illegal practice

But Ponzi became greedy and expanded his efforts Under the heading of his company, Securities Exchange Company, he promised returns of 50% in

45 days or 100% in 90 days Due to his success in the postage stamp scheme, investors were immediately attracted Instead of actually investing the money, Ponzi just redistributed it and told the investors they made a profit The scheme lasted until August of 1920 when The Boston Post began investigating the Securities Exchange Company As a result of the

newspaper's investigation, Ponzi was arrested by federal authorities on August 12, 1920, and charged with several counts of mail fraud In

November 1920, Ponzi was sentenced to five years in prison

3 The largest Ponzi scheme in history - Bernard L Madoff

Who is Bernard Madoff

Bernard Lawrence "Bernie" Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, possibly longer He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s He died in prison at age 82 on April 14, 2021, while serving a 150-year sentence for money laundering, securities fraud, and several other felonies

Founder of Bernard L Madoff Investment Securities (BLMIS)

Former two-time chairman of the NASDAQ (National

Association of Securities Dealers Automated Quotations)

Considered for the post of Treasury Secretary in the 1990s

Sat on the board of directors of the Securities Industry

Association

The scam

And for his Ponzi scheme, Madoff decided that the key to his plan was to set his interest rate at around 12% return annually And more importantly these returns were consistent because Bernie was the one who set the rate so it could be as consistent as he wanted it to be Madoff's apparently ultra-high returns persuaded clients to look the other way In fact, he simply deposited 8

their funds in an account at Chase Manhattan Bank—which merged to become JPMorgan Chase & Co in 2000—and let them sit The bank, according to one estimate, may have made as much as $435 million in after-tax profit from those deposits When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust Madoff also cultivated an image of

exclusivity, often initially turning clients away This model allowed roughly half of Madoff's investors to cash out at a profit These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money

As the previous chairman of the Nasdaq, combined with his stable investing track record, Madoff had no problem attracting more and more investors over time Another thing is he could run this scheme until he died as long as

he was collecting more money than he was giving out which is not really a thing because of his reputation, people were standing in line to give him their money But in 2008, there was a crash in the market, so virtually every stock was going down and people were pulling out their money out of the market meaning that Bernie was giving out more money than he was taking

in until eventually there wasn’t enough money to give back so his scheme finally collapsed In 2009 Madoff pleaded guilty to 11 federal crimes and was sentenced to 150 years in prison

The 65 billion dollars figure is not how much the money was actually lost, it

is how much money the investors think they lost including fabricated gains

In reality, the total money Bernie Madoff made by this scheme was only about 18 billions dollars of which $14.418 billion has been recovered and returned, while the search for additional funds continues

4 Tom Petters

Thomas Joseph Petters is a former American businessman and chairman and CEO of Petters Group Worldwide, a company which stole over 2 billion dollars in a Ponzi scheme Amid mounting criminal investigations, Petters resigned as his company's CEO on September 29, 2008 He was convicted of numerous federal crimes for operating Petters Group Worldwide as a $3.65 billion Ponzi scheme and received a 50-year federal sentence

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According to the evidence presented at trial, Petters, assisted by others, defrauded and obtained billions of dollars in money and property by inducing investors to provide Petters Company, Inc., (PCI) funds to purchase merchandise that was to be resold to retailers at a profit However, no such purchases were made Instead, the defendants and co-conspirators diverted the funds for other purposes, such as making lulling payments to investors, paying off those who assisted in the fraud scheme, funding businesses owned or controlled by the defendants and financing Tom Petters’

extravagant lifestyle

Through Petters’ scam, potential investors were provided fabricated documents that listed goods purportedly purchased by PCI from various vendors and then sold to retailers In some instances, investors also were provided false records indicating that PCI had wired its own funds to vendors, thus giving the appearance that PCI had money invested in the deals too In addition, investors frequently received false PCI financial statements showing the company was owed billions of dollars from retailers

To induce investors further, Petters often signed promissory notes and provided his personal guarantee for the funds received Those who invested, however, were not paid through profits from actual transactions Rather, they were paid with money obtained from subsequent investors and, sometimes, even their own money

On December 2, 2009, Tom Petters was found guilty in the U.S District Court in St Paul, Minnesota on 20 counts of conspiracy, wire and mail fraud In April 2010, he was sentenced to 50 years in prison for his part in the fraud

5 R Allen Stanford

Robert Allen Stanford is an American financial fraudster, former financier, and sponsor of professional sports Stanford was the chairman of the now-defunct Stanford Financial Group of Companies A fifth-generation Texan who once resided in Saint Croix, U.S Virgin Islands, he holds dual

citizenship, as a citizen of Antigua and Barbuda and of the United States He contributed millions of dollars to politicians in Antigua and the United States, amongst other countries

Allen Stanford was convicted of selling $7 billion in fraudulent certificates

of deposit (CDs) from his offshore bank, Stanford International Bank, on 10