Chapter 1 article

http://www.forbes.com/2009/09/14/ponzi-scheme-barry-markets-equities-prosecution.html

Summary:

A pyramid scheme had run for 30 years and swindled $40 million dollars. Philip Barry was the schemer and he tricked 800 investors, who were mostly his neighbors, with a Ponzi Scheme. Barry has started a company called the Leverage Management Co. which invested for people. The leverage Management Co. stated that the clients’ money would invested in securities and stock with a guaranteed returning from 12.55%-21%. This scam could be stopped if no new investors come in. However, he gave out false financial statements to attract new investors and used some of that money to pay off the guaranteed returning to the old investor.

Connection:

The financial statements are used for owner, bankers, and investors to view the actual performances of the company. It is very important for the investors to look at the financial statements to determine whether or not they should invest in the company. However, with the behavior of Philip Barry, he would make the reliability of the financial statements decrease in general. This could lead to a serious problem to the business world because people will no longer believe in those statements and investing will become a huge gamble. People who blindly invest usually end up losing all the money. It also destroys the opportunity of those companies that has potential to growth from gathering money from the investors, because investors may see that without the financial statements.

Personal Reflection:

I think this scam succeed because of the greed in human. People who invested in the Leverage Management Co were all looking for the guaranteed profits. Unfortunately, all investments involve some risks; people should realize it is a scheme once the company guaranteed for any returning. Even though, Barry used the false statements to lead the investors thought that they made a right decision, it is always the greed that was blocking people’s eyes from seeing the truth. Furthermore, from this article we have to be aware that the financial statements we get may not always telling the truth. Investing should not be just a matter of luck; the broad outcome should be predictable from the financial statements most of the time. A lot of the big corperations could not continue without borrowing money from the bankers or gathering money from the investors. When those statements lost their credibility, bankers and investors cannot predict the outcomes anymore, so they will have less chance to give out their money into this gamble. So it is extremely important for companies to follow the GAAPs and give out the true and accurate financial status to the bankers and the investors to help them make their decisions.