What is a Ponzi Scheme?
Made famous in the United States by Charles Ponzi, these scams promise high returns on investments. Each participant is encouraged to bring in new investors, but there is no actual investment. Investors’ money is used to pay out returns to those drawn into the scheme to create the appearance of a profitable investment. The only people who make money are the scam artists who skim money from the scheme.
How Does a Ponzi Scheme Work?
Ponzi schemes require a constant inflow of new investors’ money or they collapse. Even though the original investors sometimes see returns, they usually do not get all of their money back.
Promoters often encourage original investors to “roll over” or reinvest their funds in the scheme. To get people reinvesting or to help with the word-of-mouth promotion of the scheme, the fraudsters pay a return to early investors from deposits made by later investors. Fraud artists may also create fake statements to show investors how their funds are growing at a phenomenal rate.
Sometimes Ponzi scheme operators spend money on administering the scheme and paying out investors, but the majority of investors’ money is stolen or squandered.
Watch out for one or more of these common characteristics:
- Talk about pooling your money with other investors.
- People touting complicated, secret investments that have some kind of exclusivity to them.
- Individuals selling investment products who are not registered to trade securities or other investment products.
- Statements and contracts not associated with a registered firm, or documentation that looks like it could be a forgery.