Stanford Ponzi Scheme a Ponzi Scheme Is Essay

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Stanford Ponzi Scheme

A Ponzi scheme is an investment fraud involving the payment of returns to existing investors from funds contributed by new investors. There is generally no actual investment. Instead, the managers/organizers of the schemes "focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity" (SEC). Investors are attracted to Ponzi schemes because those running the schemes promise high returns and say that there is little or no risk. Moreover, because money from new investors is used to pay the older investors, early investors do see the promised high returns. Unfortunately, because there is no legitimate investment income driving the fund, when the scheme fails to attract new investors or existing investors get leery and seek to cash out of the fund, the entire scheme collapses. There are some red flags that an investor can look for that can indicate when an investment is actually a Ponzi scheme. These include: high returns with little or no risk, overly consistent returns, unregistered investments, unlicensed sellers, secretive or complex strategies, issues with paperwork, and difficulty receiving payments (SEC).

R. Allen Stanford is the alleged mastermind behind the second-largest Ponzi scheme in American history. Stanford was at one time a legitimate financier. He also owned professional sports teams. After graduating from Baylor University, Stanford began a business in Waco, Texas. That business was not successful, but Stanford did find success in real estate speculation in Houston, Texas in the early 1980s. He partnered with his father James, and the two of them made a significant amount of money when they sold the real estate after housing prices began to recover.
In the 1980s, Stanford became a bank on the island of Montserrat, which he later moved to Antigua. Therefore, he built up his personal fortune with seemingly legitimate businesses, real estate speculation and banking. However, there are some allegations about his banking practices that make them seem somewhat illegitimate.

Prosecutors allege that Stanford's Ponzi scheme is the second largest in American history. They allege that he defrauded his investors of a total of $7 billion dollars (Calkins and Harris). The way that Stanford's Ponzi scheme worked was that he used what may once have been a legitimate business, his bank in Antigua, to fuel to the scheme. He sold fraudulent certificates of deposit (CDs) in his bank in Antigua. He was able to attract a large number of investors by offering interest rates that he could not pay. "Stanford realized early on that all he had to do was promise higher interest rates on deposits and investors would flock like sheep. "That was what Allen always said, 'Two points more,'" remembers the same Guardian employee. "He told me, 'It is unbelievable. People are so stupid, they will risk all their money, give it someone they don't even know, for two points" ("Bryan Burroughs"). Moreover, the officers in Stanford's bank were believed to be in on the scheme; they were indicted, as well.

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