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Uncovering the truth about Ponzi schemes

On Behalf of | May 29, 2015 | Business Litigation |

Anyone who reads the newspaper on a regular basis has likely noticed a steady increase in the number of major financial crime cases brought by government officials. Indeed, one term people have likely come across during the course of their readings on these cases is Ponzi scheme.    

While most people understand that this term refers to a sophisticated operation like the one run by disgraced financier Bernard Madoff, they might not completely understand how exactly a Ponzi scheme works. In today’s post, the first in a series, we’ll start providing some insight into this particular form of investment fraud.

In general, a Ponzi scheme involves a party promising potential investors incredibly high returns in exchange for little to no risk. The reality, however, is that these low-risk, high-reward investment opportunities don’t actually exist.

Instead, what the organizers of Ponzi schemes do is keep trying to find new investors and, once these new investors are found, use some of their money to pay those who invested earlier thereby creating the impression that the otherwise fictional investment opportunities are actually paying dividends.

In case you’re wondering where the term Ponzi scheme comes from, it was actually named for Charles Ponzi, who orchestrated a postage stamp escalation scheme in the 1920s, falsely promising investors a 50 percent return on investments in international mail coupons within 90 days.  

Ponzi schemes can generate millions of dollars and be slow to collapse so long as new investors are found and/or earlier investors continue to supply/reinvest their funds. It’s only when this stops and investors seek to cash out in large numbers that they collapse.

We’ll continue to explore this topic in future posts, exploring potential warning signs associated with Ponzi schemes and how they differ from pyramid schemes, another common type of investment fraud.

Please consider consulting with an experienced legal professional if you are an aggrieved investor with questions about preserving assets via federal court receiverships or via state court receiverships.