What is a Ponzi scheme?
You tell 10 people to invest their money with you and you will pay them 10% interest each month. Not 10% a year like a bank. You get 10 people to each invest $100 with you. You have $10,000 total. You do not actually invest this money. You put it in your bank account and use it to live on. That is the heart of the scam. They think their money is invested in stocks and bonds. It is not. At the end of the first month, you owe each person $10 (10% of their investment). That is $100. It is not a problem since you have $1,000 of their money. You would run out of money in 10 months. So you have to ask all your “clients” to tell all their friends about this great investment. If 10 more people give you their money, you have extra money to pay everyone. The scheme continues until you stop finding new clients to cheat.
And why does it bear this name? First, you need to know a little bit about its namesake, Charles Ponzi. Anyone can work a simple swindle, but you have to be a special kind of con man to have your name become synonymous with “fraud.” Ponzi pulled it off, though. After arriving in the U.S. from Italy in 1903, Ponzi knocked around in a variety of unskilled jobs that usually ended when he got into trouble for theft or cheating customers. A few years later, he moved to Canada, where he spent a hitch in prison for passing a forged check. When he eventually drifted back down to the U.S., he needed a way to make some quick cash. Watch how a Ponzi scheme works » Making money via mail Ponzi eventually found his way to get rich quick using a vagary of the postal system. At the time, it was common for letters abroad to include an international reply coupon — a voucher that could be exchanged for minimum postage back to the country from which the letter was sent.
Recently made popular by Bernie Madoff’s 50 billion dollar fraud, the term Ponzi scheme derives its name from the Bernie Madoff of the early 1900’s, Mr. Charles Ponzi. A Ponzi scheme is a type of pyramid scheme where investors are enticed to invest by unusually steady or unusually high returns. Once hooked, the new investors’ money is used to pay off older investors at the “too good to be true” rates that originally lured them into the scheme. The scheme is dependent upon a steady flow of cash from an ever increasing number of investors (the true source of income for the scheme), and because of this, Ponzi schemes are unsustainable by nature.
