Ponzi Scheme
Ponzi Scheme
Ponzi Scheme
Investor A
Starts to Invest Money
Ponzi Promoter
Investor A Investor B
Starts to Invest Money Starts to Invest Money
On December 26, 1919, Ponzi established a firm
called The Security Exchange Company. He
boasted a return of 50-percent interest in 90
days, and the world wanted in on it. Ponzi’s
great idea created an instant "feeding frenzy,"
and within a few short months, lines formed
outside his School Street office door. Thousands
of people purchased so-called Ponzi promissory
notes at values from $10 to $50,000. The average
investment was estimated to be around $325.
The most notorious "Ponzi Scheme" took
place when he began to trade postal reply
coupons in 1919. Plenty of Americans in other
countries could include such a coupon in a
letter, to be redeemed at the post office for
enough money to send a reply. Ponzi used his
Securities Exchange Company as a front to
trade the coupons and make a 200-percent
profit.
KEY TAKEAWAYS
Similar to a pyramid scheme, the Ponzi scheme
generates returns for older investors by
acquiring new investors, who are promised a
large profit at little to no risk.
Both fraudulent arrangements are premised on
using new investors' funds to pay the earlier
backers.
Companies that engage in a Ponzi scheme focus
all of their energy into attracting new clients to
make investments.
RED FLAGS
High investment returns with little or no
risk.
Overly consistent returns.
Unregistered investments.
Unlicensed sellers.
Secretive or complex strategies.
Issues with paperwork.
Difficulty receiving payments.
Under the heading of his company, Securities
Exchange Company, he promised returns of 50%
in 45 days or 100% in 90 days. Due to his success
in the postage stamp scheme, investors were
immediately attracted. Instead of actually
investing the money, Ponzi just redistributed it
and told the investors they made a profit. The
scheme lasted until August of 1920, when The
Boston Post began to investigate his returns. The
investigation set off a run on Ponzi's company,
with investors trying to pull their money out of
it.
Charles Ponzi was arrested on August 12,
1920, and charged with 86 counts of mail
fraud. Owing an estimated $7 million, he
pleaded guilty to mail fraud, and
subsequently spent 14 years in prison. Rose
divorced him in 1937, and Ponzi died
penniless in Rio de Janeiro, Brazil, on January
18, 1949.
Beware of promises of unrealistic
returns.
Don’t rely on reputation or word of
mouth alone.
Understand your investments.
Thank you!
XD