Ponzi Scheme Explained
What is a Ponzi Scheme?
Ponzi Schemeis a fraudulent operations in which investment capital is unlawfully distributed in a deceptive manner as a means to project the illusion of financial gains resulting from investment endeavors; typically, the investment capital of newer clients will be proportioned to existing clients with the hopes of instilling confidence in the operator’s investment acumen – the newer client’s will be deceived into believing that their investment capital was invested and subsequently lost as a result of market activity:
In reality, the money that was given in good faith – as an investment – was never invested at all; in contrast, the investment capital that was given was immediately funneled into the accounts of individuals with larger investment portfolios – this particular action provides a fallacious illustration of market gains as a result of investments.
Bernard Madoff, who was indicted in 2008, is considered to be responsible for the largest Ponzi Scheme to have taken place within the history of the United States.
The History of Ponzi Schemes
The first Ponzi Scheme was recorded as taking place in 1903 by an Italian immigrant named Charles Ponzi. The eponymously-names Ponzi Scheme consisted of Ponzi soliciting investors to provide him with money to invest within the replay coupon industry. The initial investors solicited by Ponzi granted him money towards this fraudulent endeavor; however, that investment capital was misappropriated by Ponzi himself.
As Ponzi recruited subsequent investors, he funneled the new investment capital towards the preexisting investors – the final stages of the Ponzi Scheme occurred as Ponzi utilized newer investment capital to substantiate returns to the original investors. As this illegal apportionment of funds took place, Ponzi amassed a large amount of wealth as his investors suffered financial losses due to this fraudulent activity.
The Ponzi Scheme Process
By definition, a Ponzi Scheme cannot – and will not – be able to endure a prolonged period of time; eventually, the funding for a Ponzi Scheme, which is reliant on new recruitment of investment capital, must eventually collapse.
However, individuals operating a Ponzi Scheme typically will operate a Ponzi Scheme with the intent of claiming the dissipation of their respective endeavor; the originator of a Ponzi Scheme will misrepresent this dissolution as a result of financial losses sustained by the investment market – in truth, the facilitator of a Ponzi Scheme will have embezzled a bulk of this capital masked by false claims of financial loss:
The facilitator of the Ponzi Scheme will seek to recruit investors with regard to a legitimate investment proposal; typically, this facilitator will attempt to solicit individuals with large sums available for investment prospects – the facilitator will accumulate a large sum of money through the embezzlement of this capital.
Once an amount of investment capital is attained by the facilitator of the Ponzi Scheme, that facilitator may continue to solicit individuals with smaller budgets for investments; the facilitator will use this capital to repay the initial investors – this swift repayment will be used to instill confidence the investment acumen of the facilitator.
A loss of funds will be reported back to the secondary investors, while the primary investors will continue to provide investment capital with hopes of earning more return; the facilitator will continue this process until funding is depleted.
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