Most of us in the business world have heard the term Ponzi scheme but may not know exactly what that means. Though he didn’t invent the scam, a Ponzi scheme is named after Charles Ponzi. He became famous for employing the first large scale scheme of this type in 1920 after emigrating from Italy to the United States. Long before there was Bernie Madoff, Charles Ponzi bilked investors out of money with promises of great returns.
What is a Ponzi scheme?
The scheme is an entirely fraudulent operation in which investors are paid out with the money of other investors. No money is ever invested, instead, investors are promised grand returns and can only be paid by when new investors contribute to the fund. Once the money stops coming in, the scheme will fail and collapse upon itself.
How are new recruits engaged?
Ponzi scheme operators like Bernie Madoff or Charles Ponzi are infamous for promising unrealistic returns. They make it seem like you are privileged simply to be considered for the fund. Often times, you even have to be interviewed for the right to have your money stolen!
Why do people fall for the scheme?
Even if you do your homework, often times the orchestrator of a Ponzi scheme can appear legitimate. There may even be decades of documented success if a scheme is large enough to stay afloat through constant new recruits. Often, people in the sceme may unwittingly get friends involved simply because they have been provided with fraudulent returns that they believe to be legitimate. In fact, it may be the friends new contribution to the fund that is paying the imaginary gains of the party already involved in the scheme.
To conclude, be wary of any investment opportunity guaranteeing double digit returns. The truth is that no one can guarantee such a profit and anyone purporting to do so should be viewed with a healthy amount of skepticism.