Ponzi Scheme

Ponzi Scheme
A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds
from more recent investors. The scheme leads victims to believe that profits are coming from
legitimate business activity (e.g., product sales or successful investments), and they remain unaware
that other investors are the source of funds. A Ponzi scheme can maintain the illusion of a
sustainable business as long as new investors contribute new funds, and as long as most of the
investors do not demand full repayment and still believe in the non-existent assets they are
purported to own.
Some of the first recorded incidents to meet the modern definition of the Ponzi scheme were carried
out from 1869 to 1872 by Adele Spitzeder in Germany and by Sarah Howe in the United States in the
1880s through the "Ladies' Deposit". Howe offered a solely female clientele an 8% monthly interest
rate and then stole the money that the women had invested. She was eventually discovered and
served three years in prison. The Ponzi scheme was also previously described in novels; Charles
Dickens' 1844 novel Martin Chuzzlewit and his 1857 novel Little Dorrit both feature such a scheme.
In the 1920s, Charles Ponzi carried out this scheme and became well known throughout the United
States because of the huge amount of money that he took in. His original scheme was based on the
legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting
new investors' money to make payments to earlier investors and to himself. Unlike earlier similar
schemes, Ponzi's gained considerable press coverage both within the United States and
internationally both while it was being perpetrated and after it collapsed – this notoriety eventually
led to the type of scheme being named after him.
Characteristics
In a Ponzi scheme, a con artist offers investments that promise very high returns with little or no risk
to his victims. The returns are said to originate from a business or a secret idea run by the con artist.
In reality, the business does not exist or the idea does not work. The con artist actually pays the high
returns promised to his earlier investors by using the money obtained from later investors. In other
words, instead of engaging in a legitimate business activity, the con artist attempts to attract new
investors in order to make the payments that were promised to earlier investors. The operator of
the scheme also diverts his clients' funds for his personal use.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to
survive. When it becomes hard to recruit new investors, or when large numbers of existing investors
cash out, these schemes tend to collapse. As a result, most investors end up losing all or much of the
money they invested. In some cases, the operator of the scheme may simply disappear with the
money.
Red flags
According to the U.S. Securities and Exchange Commission (SEC), many Ponzi schemes share similar
characteristics that should be "red flags" for investors.
1. High investment returns with little or no risk- Every investment carries some degree of
risk,[16] and investments yielding higher returns typically involve more risk. Any
"guaranteed" investment opportunity should be considered suspicious.
2. Overly consistent returns- Investment values tend to go up and down over time, especially
those offering potentially high returns. An investment that continues to generate regular
positive returns regardless of overall market conditions is considered suspicious.
3. Unregistered investments- Ponzi schemes typically involve investments that have not been
registered with financial regulators (like the SEC or the FCA). Registration is important
because it provides investors with access to key information about the company's
management, products, services, and finances.
4. Unlicensed sellers- In the United States, federal and state securities laws require that
investment professionals and their firms be licensed or registered. Most Ponzi schemes
involve unlicensed individuals or unregistered firms.
5. Secretive or complex strategies- Investments that cannot be understood or on which no
complete information can be found or obtained are considered suspicious.
6. Issues with paperwork- Account statement errors may be a sign that funds are not being
invested as promised.
7. Difficulty receiving payments- Investors should be suspicious of cases where they don't
receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to
prevent participants from cashing out by offering even higher returns for staying put.
According to criminologist Marie Springer, the following red flags can also be of relevance
The sales personnel or adviser are overly pushy or aggressive.
The initial contact took place by a cold call or through a social network, a language-based radio or a
religious radio advertisement.
The client cannot determine the actual trades or investments that have been carried out.
The clients are asked to write checks with a different name than the name of the corporation (such
as an individual) or to send checks to a different address than the corporate address.
Once the maturity date of their investment arrives, clients are pressured to roll over the principal
and the profits.

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