What is a Ponzi Scheme?

What is a Ponzi Scheme? September 23, 2011

A Ponzi scheme is a fraudulent investment that is designed to deceive investors and ultimately make the originator very wealthy.  Most follow a similar design:

  1. Promise extraordinary returns
  2. Show historical returns and potential for profit
  3. Build credibility with testimonials
  4. Leave with investors’ money

While it’s simple in concept, some Ponzi schemes may be difficult to spot.  One of the most recent and largest Ponzi schemes in history, run by Bernie Madoff, went unnoticed for years.  Madoff promised excellent market returns and proved ‘credible’ to investors because his history with the NASDAQ and the high net worth investor profiles he managed.  In 2008, Madoff was unable to keep up with the sequence of paying old investors with new investor dollars, and was found guilty of fraud in the form of a Ponzi scheme.  It’s estimated that $30- $50 billion was lost by investors associated with the Madoff ponzi scheme.

Why is it called a “Ponzi” Scheme?

In the early 1900s, an Italian immigrant named Charles Ponzi ran an investment opportunity that promised investors a 50% return in 45 days.  The claim was that an investor could make large amounts of money because his company “Security Exchange Company” (not to be confused with the Security Exchange Commission) would purchase IRCs from one country (a type of prepaid envelope of sorts) and cash it in at a premium in other countries.

Investors flocked to Charles Ponzi’s incredible offer and thousands of people put their life savings with Ponzi.  For a while, Ponzi was brining in $250,000 a day as investors tried to get rich quick.  Many people received a high rate of return, but opted to reinvest, building the scheme even larger.

Ponzi’s fraudulent history led to the end of his scheme in the 1920’s and thousands of people lost their life savings.

Are Ponzi Schemes Common Today?

In 2010, the SEC filed 47 ‘enforcement actions’ that were considered to be a Ponzi scheme or a similar fraudulent investment operations.

If an investment seems too good to be true, and claims to provide high returns for very little risk, make sure you do your homework before investing.  The SEC provides some red flags that can help you determine if an investment operation is a Ponzi scheme or not.

The following is cited from the SEC Website:

Many Ponzi schemes share common characteristics. Look for these warning signs:

  • High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  • Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
  • Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
  • Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
  • Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

If you are aware of an investment opportunity that might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or online at http://www.sec.gov/complaint.shtml.

Have you or someone you’ve know been affected by a Ponzi scheme? 

"The amount of people deducting tithes from their taxes has gone way down, due to ..."

Is it OK to Tithe With ..."
"church leaders want us to be rich christians.one/ it looks good for the sake of ..."

5 Wrong Reasons To Build Wealth ..."
"Yes. Good debt is money spent for work tools or supplies. Or for emergency repair/purchase ..."

Is There Such a Thing as ..."
"I read through quickly so I may have missed if Mr. Wesley provided for the ..."

5 Bible Verses John Wesley Used ..."

Browse Our Archives

Follow Us!


TRENDING AT PATHEOS Evangelical
What Are Your Thoughts?leave a comment
  • Great info. I knew a general history about its origins, but many of those details are new to me (and are still surprising). Very informative. Thanks!

  • Great info. I knew a general history about its origins, but many of those details are new to me (and are still surprising). Very informative. Thanks!

  • Pingback: Wealth Artisan Updates & Yakezie Round Up - The Wealth Artisan()

  • Pingback: Wealth Artisan Updates & Yakezie Round Up - The Wealth Artisan()

  • Pingback: What is a Junk Bond and Should You Invest in Them?()

  • Pingback: What is a Junk Bond and Should You Invest in Them?()

  • Pingback: What Are Junk Bonds and Should You Invest in Them?()

  • Pingback: What Are Junk Bonds and Should You Invest in Them?()

  • A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. Well Done.. Great Information

  • A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. Well Done.. Great Information

  • A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus 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.

  • A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus 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.

  • Lily

    There was a time when Ponzi schemes were extremely popular and many people have become victims of it. Unfortunately, there are still many people who want to make money deceiving someone. There are people who know special psychological practices and make others sure that they would win lots of money if they would make an investment. And really, poor people living through online loans until payday believe that it’s their last chance to become wealthy and invest their last savings. People who try to involve others in Ponzi schemes are very good psychologists and promise their victims great income and incredible returns.

  • Lily

    There was a time when Ponzi schemes were extremely popular and many people have become victims of it. Unfortunately, there are still many people who want to make money deceiving someone. There are people who know special psychological practices and make others sure that they would win lots of money if they would make an investment. And really, poor people living through online loans until payday believe that it’s their last chance to become wealthy and invest their last savings. People who try to involve others in Ponzi schemes are very good psychologists and promise their victims great income and incredible returns.