Ponzi Scheme

A ponzi scheme is an investment fraud in which the longer-term investors receive payments from the contributions of recent investors.

In a typical ponzi scheme the promoter will advertise investment returns that are literally to good to be true.  Such promised or guaranteed returns may be a 50% to 100% return in a matter of weeks or months.  The scheme may tout investments in any industry, area of commerce or any such economic sector.  Currently, ponzi schemes are proliferating in the technology sector.  For instance, this month the United States Attorney in New Jersey charged five individuals with running a ponzi scheme purportedly based on bitcoins.  The prosecutor alleges that the scheme resulted in investor losses of $700 million during a single year.

Typically, the purveyors of a ponzi scheme advertise for investors, claiming great returns on investments into the investment vehicle.  In reality, there is no investment vehicle.  Most of the monies go to those committing the fraud.  Once a victim has invested, thepersonsbehind the scheme attempt to get this investor to reinvest the purported earnings, thus, allowing the fraudsters to avoid or limit the amounts that they must pay to the original investors to continue the fraud.  Therefore, the success of the ponzi scheme requires that the con artists continue to obtain further investors.  With this new money the operators can pay the claimed returnsof previous investors.  Ultimately, the number of investors requesting actual payment of the amounts they believe to be earned will overwhelm the incoming money.  At this point the scheme will fail, and the perpetrators will disappear with the vast majority of the invested funds.

The name “ponzi scheme” comes from an early Twentieth Century con artist named Charles Ponzi.  While Ponzi did not invent the scheme, he ran a fraud that was so successful, the type of scheme became associated with his name.

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