Ponzi Schemes

Ponzi schemes are named after Charles Ponzi, who ran such a program around 1920.

A Ponzi scheme is really quite simple. The Ponzi Scheme is advertised as an investment program touting huge returns in a short period of time. Any returns someone sees are paid out of monies gathered from the investors. No real product, investment or business takes place.

At first, the promoting of such a scheme usually has a bit of a hard time finding people to invest in such an operation. That is until someone comes in and actually wants their money back. Magically they get it plus the advertised return.

As soon as this happens, people start dumping money into the fund like crazy. People will ask friends, "How do you know that you are going to get your money back?" "Don't worry", they will tell a friend. "Leo got all his money back plus 20% for one month".

Stories like this make the fund grow ten times as fast in an even shorter period of time. Of course not long after that the fund is down and the person running the Ponzi Scheme has left town.

Ponzi schemes are similar to pyramid schemes. They differ in that Ponzi schemes are operated by a central company or person, who may or may not be making other false claims about how the money is being invested, and where the returns are coming from.

Be very careful when you hear about someone touting large returns that isn't willing or able to tell you where those returns are coming from.

Matt Gagnon