Ponzi Scheme

The free enterprise system is based on the premise that individual wealth will increase if certain financial goals are accomplished. Investing in stocks and other financial vehicles has created individual wealth in relatively short periods of time through the years so a people from all walks of life dabble in those markets.

The thought of making a fast buck with little effort is not only an American dream; it is the dream of people all over the world. People will do just about anything to achieve effortless and instant wealth. While Ponzi schemes come in for a lot of criticism, free-market thinkers often point out that power elite controlled governments operate the largest Ponzi schemes of all – by promising and implementing programs that are ultimately unsupportable.

Millions of people want to be financially secure at almost any price, and this opens a market for creative entrepreneurs that may not always play by the rules when it comes to investing other people's money. People have been giving their hard earned money to investors and brokers for years in order to increase their personal wealth, and for the most part these financial advisors try to do the right thing and invest in securities, commodities, foreign currencies, and stocks that can hopefully produce a respectable profit for their clients.

Brokers and investors are measured by their rate of return. People who invest in stocks and currencies expect a better rate of return than a basic savings account can offer so brokers are always looking for ways to increase their ROI. Most brokers do it legally, but there are other brokers that have the urge to get filthy rich quick so they resort to a devious investment strategy that is rooted in smoke and mirrors. Some investors aren't that kind. They call it blatant stealing.

Promising a high rate of return with little risk is the name of the game in investing, but it doesn't always work that way unless you use Charles Ponzi's method of investing. Charles was a clerk in Boston in 1919. He orchestrated the first investment scheme that paid old investors with funds acquired from new investors.

His scheme was based on investing in international postage stamps. He promised a fifty percent return. Banks were offering five percent in those days. Eventually he stopped buying stamps and started paying old investors with new investor money, but the rate of new investors couldn't support the funds needed to pay old investors. The plan crashed and burned and investors' dreams turn into nightmares.

The Ponzi scheme is similar to the pyramid scheme because they both use new investor money to pay old investors. The Ponzi scheme gathers new funds and redistributes them, and the pyramid scheme allows each investor to benefit from the investors below them. The recruitment of new investors is critical in both schemes, but eventually there's not enough money to go around in either scheme and they begin to unravel.

People fall for Ponzi schemes all the time, as evidenced by the recent Bernie Madoff scandal. In 2010, forty-seven Ponzi schemes were investigated. Most Ponzi schemes have red flags associated with them. Investments that yield a high rate of return with low risk should be suspects, and returns that are overly consistent are too good to be true since there is always fluctuation in any investment. Investments that are not registered with the SEC should be investigated thoroughly before any money is exchanged, plus secretive and complex investment strategies usually mean there's trouble ahead.

Paperwork that's difficult to read or is not available is a sure sign of trouble, and when payments are slow or there's difficulty cashing out, a Ponzi scheme may be in progress.

Ponzi Scheme: Site Contributions

News & Analysis

Editorials

View All Contributions for Ponzi Scheme