What is a Ponzi Scheme? I like to say that Ponzi Schemes are Pyramid Schemes gone haywire. And though some people think that all pyramid schemes are Ponzi schemes, that isn’t true at all.
Ponzi Schemes circle around an investment offer that is usually “to good to be true”. There is no pyramid, just a scheme to get investors, and then get more investors, allowing payment of earlier investors from monies paid by later investors.
Let’s dive a little deeper.
Who is Ponzi?
Though scams and schemes existed prior to the 1900’s, it wasn’t until the 1920’s that the act of “borrowing from one pocket and putting it in another” was named.
The infamous Charles Ponzi, an Italian immigrant who went by a number of pseudonyms, became the “King of Swindle”. He promised unsuspecting clients a 50% return on their money within 45 days, or 100% within 90 days by purchasing postal reply coupons in other countries and redeeming them in the US as a type of arbitrage.
In reality he was paying earlier investors with monies received from later investors. He was so known for it, that this type of activity was named for him – the “Ponzi Scheme”. He ran his scam for over a year, fleecing investors of over $20 million. In reality, it is reported that he spent no more than about $30 on stamps.
An earlier scheme – and perhaps the model from which Ponzi developed his scheme – was carried out by William F. Miller in 1899. Miller, also known as “520% Miller”, was a bookkeeper who used a similar deception to defraud people of $1 million.
How Does It Work?
A Ponzi Scheme is a form of fraud in which investors are told of an opportunity to invest in a non-existent business entity. They are promised quick returns on their investment. Monies paid to first investors come from money invested by later investors.
Often those who are able to carry this type of scheme off are well-known, trusted financial advisors or those who would possess “insider information” on investment opportunities.
You can see how something like this will eventually fall apart. Any changes in the economy can cause everyone to want their investment back, as is what happened in the now famous Bernie Madoff Scandal.
Watch this 3-minute video for a short primer:
Today’s “Ponzi Poster Child”
There is not a person alive who doesn’t remember the Bernie Madoff scandal. The investment fraud came to light in December 2008 as the stock markets took a tumble and nervous investors wanted their money.
Madoff was the former chairman of NASDAQ and was the founder of Wall Street’s then-prestigious Bernard L. Madoff Investment Securities, LLC. He was obviously well respected AND well connected to wealthy individuals. However, some who were middle class folks invested everything with him and lost it all.
It was in December 2008 that he admitted that the wealth management arm of the business was an elaborate multi-billion-dollar Ponzi scheme.
His own sons alerted federal authorities, and the rest became history. Madoff was sentenced to 150 years in jail – perhaps not even long enough for those who lost a fortune.
Read more on the Madoff Investment Scandal on Wikipedia
How to Spot a Ponzi Scheme
There are a few “red flags” you can look for:
- Check to see if the investments are registered with the SEC
- Is the seller licensed to sell investments? Law requires that individuals working in securities firms be licensed. Schemes are often carried out by unlicensed individuals.
- High investment with little or no reported risk – every investment carries risk to some degree
- Overly consistent returns – investment returns tend to go up and down
- Secretive or complex investment strategies – avoid investments that you do not understand
- Issues with paperwork – do not accept excuses with regard to proper paperwork
- Difficulty receiving payments – be suspicious if you have a problem cashing out your investment.
Read more on the U.S. Securities and Exchange Commission website
The Bottom Line
If it seems to good to be true, it probably is, even if the person offering the deal is famous or well-known. Period.
Related:
You said very well what the Ponzi scheme is. I agree with what is written – if it seems good to be true, it probably is. All the prospects that promise get rich quick are supposed to be suspicious. I still believe in the need to strive for success, invest your time and work toward goals, and upgrade your knowledge.
Nicely written Marsha,
Ponzi Schemes are a blight on this earth, especially Madoff’s story, I only just knew about it but I think everyone should know more about it. Stealing a fortune from investors for his own billionaire ponzi scheme, I just couldn’t fathom why people can actually go far to that extent. I hope one day we wouldn’t have to worry about these schemes anymore.
Hello there! Thank you very much for sharing this article on ponzi dissected. I’ve gone through it and it’s a very detailed one. I also find it very helpful as it contains valuable information. I really dislike any platform that engages in pyramid or Ponzi schemes. For me, I feel like they’re all not legit and are scamming people. The nickname of Charles Ponzi, king of swindle says it all. Some people are still swayed by this and I’m going to share this article with them for them to know better.
That’s about right..there are other versions. I am very well versed in this. In fact I co developed an organization…a comminity actually tha0t educates consumers on what to look for, ESPECIALLY in the Cryptocurrency world.
Hi,
Thanks for the article.
It’s unbelievable how people are still able to successfully set up Ponzi schemes and swindle money from thousands to millions of people. This happening in the Twentieth Century when the painful history of Ponzi schemes is documented for over a century now!
But one cannot help but wonder whether the economic downturn such as has occurred since 2008 is pushing all of us to engaging in desperate bids at creating wealth, without due caution. And now with the depression caused by COVID-19, the situation is unlikely to improve soon.
But I must say, I can’t put myself in the mind of people who carry out cruel acts that had so many people!
Regards
Teboho, I think you have a good point. The economic downturn has left people scrambling to find “quick cash ideas”. The problem is, there are none, except for things like this that are thievery.
It’s very funny how the name ‘Ponzi scheme’ actually came from a man’s name, just a fact I never knew. It is quite unfortunate though that a lot of people have followed in his footsteps to con hardworking people of their hard-earned money. Thank you for the pointers on how to spot a Ponzi scheme, such a good read.
Hello there, thanks a lot for sharing this wonderful piece of information here with us. I must say i really did enjoyed going through your review as it contains valuable informations one needs to be aware of. Personally i have gone through hell when i was engaging myself with ponzi schemes, i have learnt my lesson never to go through that again.
A broader view about ponzi schemes and the reason we should all be wary of joining them. They honestly are too bogus in their claims and what they promise. I have been in many ponzu schemes in the past and I would say, it was a very bad period for me. Seeing information like thus would always help us to ensure we stay ahead and prevent ourselves from falling victims to all these. Thanks
I am thrilled. Getting to know the history of Ponzi scheme is very interesting and exciting for me. Who knew Ponzi was actually the name of a person, who was fraudster in the 1900s. Talking about Bernard Madoff, I remember watching the movie about his scandal, titled “Wizard of Lies”. A very interesting movie. Thanks for this beautifully written article that is full of information and knowledge about Ponzi scheme. Now I know the history of Ponzi scheme and the difference between Pyramid schemes and Ponzi schemes.
I’m pleased I came across the article. So many people are falling victims to scams these days and awareness-raising is critical to help more people spot the signs of questionable business opportunities. It’s crazy to me that Bernie Madoff launched a Ponzi scheme after the career he had held prior to this. It just goes to show how much due diligence you need to do before making investments. The ‘too good to be true’ line holds true in my experience.
Wow!, What an eye opener. Sorry to say today many of us are still falling victims of Ponzi scammers. The inter net marketing has been a major way of their operation . Many of us have been victims of their ploy. I can`t see any difference between Bernard Madoff and some Affiliate marketing scammers who are flouting leased flashy cars and big mansions in the social media to deceive people signing up for them.
Lucky we are here studying hard to leverage the market and make a living out of it. Hopefully non of us here will be like them.
Once again thanks for such exposure.