A Ponzi scheme is a fraudulent and illegal business practice where people are scammed into investing in a false business that pays high financial returns to early investors with funds from more recent investors. Participants believe their money is being invested in a business or the stock market when in reality, it is being shuffled from investor to investor in order to look like a successful venture.
Ponzi scheme investors are unaware of the fraudulent practices and promised quick and easy returns by scammers. They become victims and believe recurring profits are from legitimate business activity while remaining unaware of the source of their profits.
Ponzi schemes endure for years as most investors continue recycling their profits for larger returns. Con artists lure more and more investors over time to keep the scheme going. Because recruitment for a Ponzi scheme is hard to keep going, they usually fall apart and are found out when scammers run out of money to pay their line of investors. Most of the time, investors do not see monetary recovery and can go bankrupt.
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Ponzi schemes are sometimes referred to as ‘Peter-Paul’ scams as they are relatable to the expression ‘Steal from Peter to pay Paul.’
Are Ponzi schemes illegal?
Ponzi schemes are illegal white collar crimes and can include charges of money laundering, bank fraud, wire fraud, tax fraud, securities fraud, and more. Ponzi scheme charges can carry upward of 20-30 years in federal prison.
Bernard Madoff leaving bail hearing in New York in 2009. Madoff orchestrated the largest Ponzi scheme in history.
Who do you call about a Ponzi scheme?
If you believe you are a victim of financial fraud, you should gather all information, checks, and documentation possible and speak with an experienced attorney. You can also contact your state attorney’s office and the Securities and Exchange Commission.
Is a Ponzi scheme similar to a Pyramid scheme?
Ponzi schemes and pyramid schemes are similar but different. Pyramid schemes promise members financial returns and dividends or services if they recruit other members. Members market the scheme in order to grow the different levels of investors which may or may not include the purchase of products or services.
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A Ponzi scheme does not rely on members to recruit more members. Both pyramid and Ponzi schemes rely on new investors to continue the scam.
Who is Charles Ponzi?
Charles Ponzi was an Italian immigrant and the first con artist to use investor funds to scam individuals. In 1920, in just eight months, Charles Ponzi scammed about 40,000 unknowing investors into roughly $15 million with a postal supply scheme.
Ponzi received a letter enclosed with a prepaid international postal reply coupon from Spain. The coupon cost 30 centavos in Spain but could be exchanged for a 5-10 cent US postal stamp. He realized purchasing postal coupons in Spain could transfer to about 10 percent profit if sold in the US. He called his company the Securities Exchange Company and sold bulk purchases to thousands of people. He was arrested on August 12, 1920, and charged with 86 counts of mail fraud.
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What did Bernard Madoff do?
Bernard ‘Bernie’ Madoff, a money manager on Wall Street, robbed investors over a period of 17 years of an estimated $64.8 billion, the largest Ponzi scheme in history. Kevin Bacon, John Malkovich, Larry King, Sandy Koufax and UK banks were some of Bernie Madoff’s victims. Bernie Madoff received 150 years in prison for his crimes including fraud, money laundering, and theft. He died in prison in April 2021 at 82 years old.
Bernard Madoff, right, leaving U.S. District Court in New York City in 2009. ( )
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