Question

Having some clients who are less knowledgeable about investing and seem to be more trusting of their firm, the management of a financial advising organization has decided to use cash from newer investors to pay off older ones. The actions of management are an example of ____________.a) a code of conduct b) a Ponzi scheme c) a business plan d) insider tradinge) a JIT system

Answer 1

Answer:

The correct answer is b) a Ponzi scheme.

Explanation:

The Ponzi Scheme is a fraudulent investment operation that involves paying investors interest obtained from the money of new investors (and not from the generation of genuine profits). It is a pyramidal system, in which the only way to share benefits requires that participants recommend and capture (refer) to more clients with the objective that new participants produce benefits to primary participants.

This system does not invest in financial or other instruments, it only redistributes money from some investors to others, so the system works only if the number of investors in the pyramid continually grows; once people stop entering the "business", the scammer is prevented from fulfilling his promise and the pyramid collapses