Sean P. Dixon
Business 670: Legal Environment
Instructor: Jennifer Stephens
April 4, 2011
Americans lose hundreds of millions of dollars each year to fraud. Billions more are lost world-wide to con artists touting the next great investment idea, guaranteed loans and diets that can't fail. These con artists do not discriminate between the rich and poor, the young and old, nationality or race. They target the well-educated, so-called smart individuals as well as those with less education and sophistication. Fraud through the use of a Ponzi scheme is very common within the business world among governments, corporations, executives, and management. Not only is committing fraud illegal, for many people it is an ethical issue as well. When innocent people are taken advantage of by others, many legal and ethical issues are raised. The following paragraphs shall describe fraud in detail, the types of fraud, the effect it has on the business world today, how to avoid ethical issues as an employee, and how to lead ethically. Fraud in the Business World
Fraud is one of many “white-collar crimes” that take place within this world we live. White-collar crime is a crime committed by a person of respectability and high social status in the course of his occupation (Lozano III, n.d.). Since the time that white-collar crime was coin in 1939, technology, extreme financial pressures and opportunity have combined to entice once-respected employees into financials scandals.
Fraud is more prevalent today than in the past. There are companies, such as Enron and WorldCom, engaging in fraud at a corporate level. The media gives these large publicly traded companies plenty of attention. But beyond the public eye, fraud is more pervasive than people realize. It’s estimated that as much as five percent of the gross domestic product is lost to fraud (Lozano III, n.d.).
The types of fraud vary by industry. Skimming the cash before it hits the till is a common fraud in small, cash-type businesses. In the insurance business, fraudulent billings are the most common, and at the corporate level, concealing liabilities or expenses tops the list. However, the type of fraud is only limited by the perpetrator’s imagination (Lozano III, n.d.). Some of the new types of fraud involve the internet, such as identity theft and fraudulent credit and debit card abuse. Bank losses to credit card fraud are off the chart these days, and are a growing concern in the marketplace. Ponzi Scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors (http://wikipedia.com, 2011). The people committing the fraudulent scheme focuses on attracting new money to make promised payments to earlier stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity (http://www.sec.gov, n.d.). The scheme entices new investors by offering returns on their investments that others cannot guarantee. These returns are usually in the form of short-term returns that are abnormally high or unusually consistent. A Ponzi scheme advertises and pays such a great rate of return on client investments, thus requiring an ever-increasing flow of money to keep the scheme going. Why do Ponzi Schemes Collapse?
Ponzi schemes are destined to collapse at some point due to not taking in earnings that is equal to or higher than the payments that are owed to the investors. The schemes collapse when it becomes difficult to attract new investors or when many of the large investors ask to cash out (http://sec.gov, n.d.). Before there is a collapse though, the legal authorities usually interrupt the scheme due to the promoter being accused of or selling unregistered securities. The more investors enter the scheme, the more likely that the scheme shall grab the...