Red Flags and Ponzi Schemes

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Red flags or signs, signals and significant circumstances of financial pyramids are described in the article “Recognizing and Responding to red Flags: The Stanford Ponzi scheme” by Antonie Warwick-Young Walsh and Albert D. Spalding, Jr from Wayne State University. The aim of this case study is to bring the attention of investors, managers, auditors and students of business departments how to recognize such red flags and how to respond to them. Specific skills and tactics that include financial auditing and forensic investigations are recommended by authors. Allen Stanford, the founder, owner and manager of the Stanford Financial Group, was arrested in June of 2009 and was sentenced 110 years in 2011 for investment fraud that involved $7-8 billion, the second largest one after Madoff with approximately $65 billion of fraud. The authors of this case study raise a question how it is possible to fool so many people and for such a long period of time, about 15 years, and nobody noticed that something was wrong, but even if noticed, why remained silent, “didn’t blow the whistle”. We deep in history to understand a nature of financial pyramid scheme. History knows a lot of examples of financial fraud and dates back to XVII-XVIII centuries. One of them is John Law and his Mississippi Bubble or better known as Mississippi Company in 1718-1720. John Law received the permission of French government to open a bank, the Bank General later Royal, issuing paper money or bank notes in 1716 that were supposed to be supported by the bank’s assets of gold and silver. Law created a company that controlled all trade in precious metals and furs between France and its Louisiana and Canadian colonies. Law raised money by selling shares of the company for cash that brought many investors. When in January 1720 stock prices began falling, investors sold shares to get gold back that

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