Ponzi schemes uncovered.

• Author: Wright, Leonard C.

Ponzi Then and Now

Ponzi schemes got their name from Charles Ponzi, an Italian immigrant who duped thousands of New England residents into investing in a postage stamp speculation scheme in 1920. At a time when the annual interest rate for bank accounts was a mere 5 percent, Ponzi promised investors that he could provide a 50 percent to 100 percent return in just 90 days.

He initially bought a small number of international mail coupons in support of his scheme, but quickly switched to using incoming funds to pay off earlier investors and support his own personal lifestyle. Before engaging in the massive fraud, Ponzi spent time in prison in Canada for check fraud and in the United States for smuggling illegal immigrants into the country.

Ponzi Scheme Defined

The SEC defines a Ponzi scheme as an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

In many schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. This is what happened in the Madoff fraud.

Ponzi Tsunami

What follows are a handful of Ponzi and fraud schemes taking place in recent months. Take note of the mistakes made by victims in these cases ... and watch out!

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Millions...