Fake Fridays

Ponzi scheme

One con that has never gone out of style after more than a hundred years is the Ponzi scheme.  Every year, I hear of businesses being exposed as Ponzi schemes.  The fraud Bernie Madoff committed is considered the biggest Ponzi scheme in U.S. history.  A Ponzi scheme even helped bring down the Albanian government in 1997.

Although there are many ways to disguise the fraud, the essence of a Ponzi scheme is to pay early investors with the money received by later investors.  Very little if any real investing is ever done on behalf of the investors.

The con is named after Carlo Ponzi, also known as Charles Ponzi, although he did not invent the scheme.  In Brooklyn, in 1899, William Miller, who is profiled in The Confidence Game, used this fraud to steal between $1-$2 million dollars from investors, according to Hoaxes and Scams.  But Ponzi made the con famous.  In less than a year, in Boston, 1920, Carlo Ponzi defrauded investors of $5-$10 million.  As Hoaxes and Scams states, “no one ever knew for sure” how much how much Ponzi stole.  To read more about Carlo Ponzi, click here for the Wikipedia article.

The Securities and Exchange Commission has an excellent page on its website about what Ponzi schemes are. It also compares it to Pyramid schemes, another kind of fraud.  The website also gives advice on how to protect yourself from this kind of con.



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