The concept is named after the Italian fraudster Charles Ponzi who in the early 1900s was behind one of history’s most extensive schemes.
Charles Ponzi started the Securities Exchange Company as a cover up for his fraudulent activity. Investors were promised 100% return in 90 days, and the explanation of how this was possible was speculation in postage transactions in Europe’s unstable economy in the interwar period. The concept was a huge success in terms of the number of people he was able to lure to invest their money. The concept collapsed in 1920 and Ponzi was sentenced to five years in prison for his extensive fraud.
Ponzi will always be remembered as the first person to use the well-known Ponzi scheme, but he has since been surpassed several times. In 1899, William Miller launched an investment company announced a 10% weekly return. He was also caught and sentenced to 10 years in prison after tricking investors for around $ 1 million.ALSO READ: Warning to novice Forex Traders.
A Ponzi is a fraudulent investment scheme that promises guaranteed returns to its investors from their own money rather than profits earned from a legitimate business venture. Ponzi schemes are perfect for con artist because they can easily be setup. All they need is to look official, a little advertising and lots of people who are will to invest their hard earned money. Here is an example of a typical pitch for the Ponzi scheme:
“Invest right now for big returns in only six months! It’s 100% guaranteed and risk free!
Don’t worry we’ll take care of all the paperwork for you. This is perfectly legal, but this is a secret so don’t tell anyone that you are investing”
The con artist pockets the investors’ money.
The circle of investors grow and the con artist uses some of the new money to pay earlier investors, saying that they have profited from their investment and that more is coming.
Earlier investors become believers, so they recruit family and friends to join in on the secret investment and at the request of the con artist, the earlier investors re-invest their money again.
Again, some of the new money is paid to earlier investors to keep their appetite and greed going.
Eventually, the con artist can’t bring in enough new investors to make good on promises he has made to earlier investors. The scheme collapses. At this point the con artist takes off and most, if not all, loose everything.
Spotting a Ponzi scheme
You can easily spot a Ponzi by watching out for these typical signs:
- The investment is described as guaranteed and risk free.
- Financial statements and documents are either questionable or completely nonexistent.
- The answers to your questions don’t make any sense.
- Check are made payable to the individual, not the company.
- The mail goes to a post office box.
- Insists that you must invest now before it’s too late.
- It sounds too good to be true.
Don’t invest your money if you see any of these signs.