What is a Ponzi scheme and why is it illegal
A Ponzi scheme is a scam that involves fraudulent investing. The scheme promises high returns to the investor and is similar to a pyramid scheme. The scammer then uses the money of new investors to pay the returns of earlier investors.
Early on the scheme generates large returns for investors and looks great. In turn, this leads to more people who want to invest into the scam. Eventually, the truth is revealed as there are little to no new investors and the money dries up. When there is not enough money to pay all the investors the scam falls apart.
Because new investors are so important to keep the scam going as long as possible, the Ponzi scheme creators use most of their time to attract new investors. The fraudsters promise huge returns with little risk. With older investors seemingly getting huge returns made from real investments, scammers can point to them to entice new investors.
The term Ponzi scheme was named after a fraudster named Charles Ponzi in 1919, but they were happening even before then. Since then, in 2008, Bernie Madoff was convicted for running one of the largest Ponzi schemes of all time. It was estimated that Madoff scammed people out of 64.8 billion dollars. Madoff created a Ponzi scheme based on investments that never happened. He had so many investors that his scheme went on for years without detection. It wasn’t until his son notifying authorities about the truth was the scam revealed.
Ponzi schemes tend to have common signs:
1. The investor guarantees nothing but fantastic returns
2. They promise that there is no risk to your investment
3. The investments are not registered with the Securities and Exchange Commission (SEC)
4. There is little to no transparency
5. Investors are given little to no information about the investments
6. Regardless of the market, investors are getting great returns
Ponzi schemes have been around for over a hundred years, if not longer. Where there is
money there often times is greed.