Ponzi Schemes – What are Ponzi Schemes?

Ever since the idea of investing money was created there have been dishonest people who are looking to make money off of the innocent trust of others. In the last decade or so, Ponzi schemes have made headlines all over the world for stealing money from unsuspecting investors. The most famous of all the Ponzi schemes is the one perpetrated by Bernie Madoff in 2008 that wound up costing investors over $65 billion from a list of clients that included famous actors and wealthy business people. The Madoff scandal is what brought this kind of crime to the attention of the general public, but dishonest investment companies have been stealing money from people for years in this manner.

Ponzi schemes first got their name from an investor name Charles Ponzi who used the age-old scheme in 1920 to steal millions of dollars from unsuspecting clients. Prior to Charles Ponzi, this kind of crime did not have a name even though records of it happening go all the way back to the mid-1800s. Ponzi schemes started to pick up speed in the 1980’s when cases of scandals all over the world were being reported. But, for some reason, these crimes were never very widely reported. People were losing hundreds of millions of dollars in these elaborate schemes and the world heard very little about it. The lack of attention in the media is one of the reasons these schemes were able to exist for so long. Once Madoff’s crimes made the news, people got smarter.

Ponzi schemes are investment frauds where the only income coming in to the scheme is the money being given up by the clients. The person or firm at the center of the scheme is not investing the clients’ money. Instead, the money is being used as a personal income to the criminals running the scheme. Ponzi schemes usually persist until someone gets suspicious and calls the authorities, or the fake securities being sold by the investment house cause government investors to be suspicious.

It is difficult for inexperienced investors to differentiate Ponzi schemes from legitimate investments. One sure way to determine Ponzi schemes if the rate of return on an investment seems to remain consistent for an unusually long period of time. Real investments gain and lose money on a regular basis, a scheme gives returns that do not vary much and are always gains. Most people are not clued in that it is a scam because they keep getting official looking statements. It is not until they try to get their money back that they learn the truth.

About Richard Wilson