In this episode we take you behind the scenes of a
Ponzi scheme where unbelievably good returns are offered to
investors, the scheme operator seems to be trustworthy - but it's
all smoke and mirrors.
ASIC investigators Kaan Finney and David McArthur explain how
Ponzi schemes work, how operators attract investors, how ASIC
investigates and shuts down these schemes and most importantly, how
can you can avoid getting caught up in a scheme.
Katie: I'm Katie Davis-Hall-Watson and
welcome to the official podcast of the Australian Securities and
Investments Commission. Today we'll take you behind the scenes of
an investment scam called a ponzi scheme with ASIC investigators
Kaan Finney and David McArthur. Welcome David and welcome Kaan.
David/Kaan: Hi Katie. Hi Katie
Katie: So David, can you tell us what is
a Ponzi scheme and how does it work?
David: It's an investment scam where the
promoter convinces people to invest in the scheme. Money is
deposited by early investors and used to pay the first round of
returns. However, new money invested is used to pay older returns
to investors. People are led to believe there is an investment
because of this when often there actually is no investment at all
or the investment is not what they think it is.
It's like a washing machine and money goes round and round. New
money comes in to pay old investors. They put their money in and
they see the initial returns and they're very good, so people are
given confidence to keep investing or keep their money in the
We've seen returns very high, promised very high in these
schemes, as much as 10 per cent a month. Which is obviously very
high so if you put in $10,000 in a month you'd get back $1000, so
that's obviously an obscenely high return.
Katie: So Kaan, tell me where does the
name 'Ponzi' actually come from?
Kaan: Well this is an interesting story
Katie, it comes from Charles Ponzi who ran exactly the scheme that
David just spoke about back in the 1920s and he thought he had
actually found, theoretically, a way to make money whereby he was
buying effectively postage stamps from Europe and then he was able
to sell them in the United States and make a small profit, only
somewhere in a few cents in the dollar on the postage stamps that
he sold. But he convinced everyone, a lot of people, that this was
a way that he could make significant returns for them, so a lot of
people started tipping money into his scheme and he started paying
people; new investors out of old investors' money. And really built
up what would, in today's terms be, millions of dollars' worth of
investors and then was able to buy into banks and when the whole
thing collapsed, he almost brought down a number of banks in the
Katie: So Kann, in the cases you've
investigated, how do people get caught up in these schemes?
Kaan: Well Katie I think the word that
comes to mind is 'trust'. People just have trust in the ponzi
operator and the ponzi operators exploit that trust and take
advantage of those people's good nature in terms of getting money
out of them. And they convince them that they've discovered, the
ponzi operator has discovered a secret way to make money and Dave
and I always say, you have to think if someone's discovered a
secret way to make money, why would they be giving it away to other
people. And they will target particular communities to get deep
into that community and exploit that trust within the
Katie: So how do they build up that trust
with a community?
Kaan: Well often they will use family and
friends to spread the word. And there's nothing better than a
recommendation from a family or friend, even just for a holiday
trip, but it's the same with investments. So, people think, well if
my friends invested and they're getting returns, I want to get in
on this action as well and they feel like they are missing out if
they don't get in on the action.
But you know we see people who try to do the right thing every
now and then. So in one case we saw a guy who only invested a small
amount initially to make sure the scheme actually worked, sort of
$10,000 and then he built that up over the next 6 to 8 months and
invested $30,000 and then $90,000 and eventually he tipped all of
his money in - almost $400,000 and the scheme collapsed a couple of
months later and he lost everything.
Katie: So, can you tell us about a ponzi
scheme you've investigated and take us through the case?
David: Sure. So, one case we've
investigated was a ponzi scheme operator called Sunny Madhoji, in
Brisbane, in Queensland. He was ultimately charged with 55 counts
of fraud. This was a joint investigation with the Queensland
Police. He was convicted in 2016 and sentenced to over 7 years
imprisonment. He was also banned for life from providing financial
advice by ASIC.
Interestingly he was actually a licensed adviser. He was only
licensed to deal in wholesale products. His strategy involved
trading in shares for a pool of clients. Now he marketed himself as
a very successful share trader and mathematical genius, which he
used, apparently to do his trading. He started losing money he was
trading for people. To cover his tracks he started taking money
from other people's accounts to put into the accounts he needed to,
to honour redemptions. This obviously caused a lot of problems and
the scheme ultimately imploded which caused the loss of over $3
million in losses to clients.
Strangely enough he didn't actually profit financially himself.
It was only his reputation that he wanted to secure so he was
stealing money from other clients and moving it around to make sure
that his reputation remained intact.
The clients in this matter agreed to allow Madhoji to have
complete access to their funds so that he could trade at his
discretion. This was obviously a highly aggressive and risky format
and not a format that would be recommended by any retail financial
Katie: Kaan, why does ASIC take on these
cases like this?
Kaan: Well ASIC wants to maintain trust
and integrity in the financial services system and we often find
that these schemes have a financial services element. The operator
is saying that they are investing into foreign exchange or into
equities, those sorts of things so there is that financial services
element. And we like to take strong enforcement action to both
punish the offenders and deter other ponzi scheme operators.
We also like to, where we can, obviously, grab hold of whatever
assets are remaining so there can be some return to investors but
this can be difficult because often, by the time it's reported to
ASIC a lot of the assets are gone so we encourage people where they
think something's not right to report it to ASIC as early as
possible so that we can look at it.
These are often complex investigations however, and that means
we have people, the ponzi operator, trying to deceive both us and
the investors. And so, they can be lengthy investigations.
Katie: So Kaan what are the penalties for
running a ponzi scheme?
Kaan: Well there are criminal offences
that can be committed if a person runs a ponzi scheme because
effectively they are just committing fraud against the investors
and some of the penalties for fraud are up to 14 years.
Recently some of the other offences under the Corporations Act,
the penalties have been increased and the Courts certainly take a
dim view of people who engage in this sort of behaviour.
Katie: So, David, what should investors
look out for to avoid getting caught up?
David: You always have to ask yourself,
'Is this too good to be true?' It probably is. You need to do good
due diligence. Firstly you need to check that they have an
Australian Financial Services Licence with ASIC. You need to really
look at the company and make sure the word of the operator and your
friends is not just what you are going on. Despite the fact that we
all know a personal recommendation from a friend is very
persuasive, but we need to look into that and be sure we are
getting what we think we are.
It's important to realise that a professional website,
persuasive-looking materials and documents, doesn't necessarily
mean that the company is legitimate. You need to ask yourself:
'What do you really know about that company and the people running
it'? If you are entrusting someone with your hard-earned savings
you need to be really sure that it is what you think it is.
Katie: So Kaan, what other tips do you
have for people to avoid getting caught up in ponzi schemes?
Kaan: Well we always recommend you deal
with a licensed financial adviser and you can check whether they
are licensed and what products they can advise on, on our Financial
Advisers Register. But if you are offered an investment opportunity
from someone you trust, a family member or a friend, then go out
and get that advice from someone who is independent and who is
licensed and authorised to provide advice and see what they say
about the investment opportunity.
Katie: Thanks so much Kaan and David,
thanks for speaking to us today on the podcast.
There are more practical tips on how to avoid ponzi schemes and
other types of investment scams on ASIC's MoneySmart website or you
can subscribe to our media releases to find out about the latest
matters we are investigating here at ASIC.
And if you have feedback on this podcast, we'd love to hear your
thoughts. Send us a tweet to @ASICmedia