Case study ponzi scheme

Maria invests through a friend

""First-time investors Maria and Jason borrowed $70,000 to invest in the overseas money market after a recommendation by their friend of 40 years, Steve. They were both shop assistants getting close to retirement and had never owned shares before as they could never afford it.

Steve told them that their investment would involve no risk at all as it was guaranteed by the Bank of America. He said they could withdraw their capital at any time after the first 12 months. The return promised on the investment was fantastic. Even after Steve's commission (40% of their return) they would still make 26% per year on their initial investment. Steve helped Maria and Jason arrange to borrow the $70,000 that they would invest.

But the scheme was not real – they were caught up in a ponzi scheme. Part of the money they and other early investors deposited was used to pay their first dividend cheques. When the money for dividends started to dry up, Steve said that it was due to the interference of ASIC. This was one of many false stories fed to the investors by Steve, to keep them onside.

Jason and Maria were angry with ASIC as they thought the organisation was ruining their chances of making some money from their investment.

Maria and Jason hung in there with Steve through all his many excuses. They wanted to believe him as they didn't want to think they had lost all their money, and he was an old friend.

When the truth eventually came out that the scheme wasn't real, Maria and Jason, along with the other investors, assisted ASIC's investigation and prosecution of Steve and his business partner.

Maria and Jason lost their $70,000 and ended up having to pay off the loan. When Jason's mother died, his inheritance was completely swallowed up by the $70,000 debt plus interest. This money would have been put to good use in their retirement.

Jason and Maria are very wary these days. They warn others to get a second opinion from a licensed financial adviser before investing in anything.

ASIC successfully prosecuted Steve and his business partner and they spent more than 2 years in jail.

This is a true story – only the names of the investors have been changed at their request.

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Last updated: 23 Aug 2011