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Before you fall a victim of another Ponzi scheme - BUSINESSDAY

MAY 15, 2019

Barely three years after losing millions of naira to several Ponzi schemes with many yet to recover, a similar peer-to-peer pyramid scheme is gradually gaining traction among young Nigerians, named LOOM. Organizers of the Ponzi scheme are requesting for as low as N1000 or N13,000 with a promise of 8x the value of the investment within 48 hours.

Ponzi scheme got its name from Charles Ponzi who made an elaborate scam in the 1920s. Figures from the Nigerian Electronic Fraud Forum, (Neff) shows that over N12 billion were lost by Nigerians to several Ponzi schemes in 2016.

Similar to other Ponzi schemes, the Loom pyramid has four color-coded levels namely, purple, blue, orange and red. The first to sign up for the group sits in the central level (red level) and gets the payout when the group fills up.

Two people sit in the orange level, while four investors fill the blue level. The purple level takes new entrants with eight spots open. Potential investors are typically invited to join a WhatsApp group and advised to get as many other investors as possible as the scheme only works if it keeps a steady stream of new investors to pay earlier investors. The more people are recruited into the group, the quicker it breaks and the quicker the payouts are to investors. The initial investment is usually paid to the group admin who sits in the red level.

Looking at the modus operandi of this scheme, it is clear that it is not a sustainable investment scheme as participants will eventually lose their money in the system. When investors start to dry up, groups will take a longer time to fill up, and newer recruits will lose their investment without any payouts. This will only be averted if there’s an unending supply of new investors, an impossible feat.

Chinedu, 25 recalls with sadness how he lost his NYSC savings to several Ponzi schemes two years ago.

“I was serving in Akwa-Ibom and was introduced to the MMM by a fellow corps member, the prospects look attractive and joined using my monthly allowance, all the money eventually went down the drain,” he said

According to Chinedu, there is a possibility that early participants would get paid very fast but the temptation to make more cash will lure them to try again and most times they get trapped. “Ponzi makes and breaks” he added.

How to identify a Ponzi scheme

A notable feature of Ponzi schemes is that the returns promised participants are attractively high and based on this, investors are promised early returns in the hope that the early investors will spread the “good news”, thereby inviting more contributors to the scheme. Once new contributors join the scheme, their cash would be used to pay out high returns to older investors.

Also, Ponzi schemes by nature do not have any underlying assets that the money is invested in.

The only way they can guarantee consistent returns is the recruitment of new members. Once the rate of growth of new members starts to drop, the likelihood of the Ponzi collapsing gets higher.

Unlike most investment schemes such as mutual funds, pension funds, ETF’s, etc., which are all recognized and regulated by the Security and Exchange Commission (SEC), Ponzi schemes do not have such oversight. As such, investors do not have any form of recourse, exposing them to the risk of losing their entire investment when it collapses.


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