Ponzi Scheme

• Author: Jeffrey Lehman, Shirelle Phelps

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A fraudulent investment plan in which the investments of later investors are used to pay earlier investors, giving the appearance that the investments of the initial participants dramatically increase in value in a short amount of time.

A Ponzi scheme is a type of investment FRAUD that promises investors exorbitant interest if they loan their money. As more investors participate, the money contributed by later investors is paid to the initial investors, purportedly as the promised interest on their loans. A Ponzi scheme works in its initial stages but inevitably collapses as more investors participate.

A Ponzi scheme is a variation of illegal pyramid sales schemes. In a pyramid sales plan, a person pays a fee to become a distributor. Once the person becomes a distributor, he receives commissions not only for the products he sells but also for products sold by individuals that he

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A Ponzi scheme is a type of investment fraud that promises investors exorbitant interest returns on their loans. The scheme takes its name from Charles Ponzi, who, in 1920, sold nearly 10 million dollars in promissory notes before declaring bankruptcy and, ultimately, being sentenced for fraud.

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brings into the business. These new distributors are beneath the person who brought them into the pyramid scheme, so they are "under the pyramid." In illegal pyramid schemes, only the people at the top of the pyramid make substantial money because they get a commission from the products sold by everyone below them. As more people become distributors, the persons lower in the pyramid have less chance to make money.

A Ponzi scheme was once was called a "bubble," but it was renamed in 1920 after Charles Ponzi and his Boston-based company had collected almost $10 million from ten thousand investors by selling promissory notes that claimed to pay 50 percent profit in forty-five days. When the scheme was exposed, a Boston bank collapsed, and investors lost most of their money.

Ponzi, an Italian immigrant, thought of profiting from the widely varying currency exchange rates for International Postal Reply Coupons (IPRCs), which were redeemed for stamps. IPRCs were intended to facilitate the sending of international mail. The sender put an IPRC, rather than a stamp, on a piece of mail going to another country, and the recipient exchanged the IPRC for the appropriate stamp in her country.

Ponzi contended that he...