Ponzi Scheme
A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.
Named after Charles Ponzi, a 1920’s Boston-based con man, the Ponzi scheme is a type of pyramid scheme where returns are paid to existing investors from the investment of new investors. These schemes differ from pyramid schemes in that pyramid schemes require recruitment of additional members to generate revenue, whereas Ponzi schemes do not. Pyramid schemes are illegal in many countries, including the United States.
Ponzi schemes rely on a constant flow of new investors to keep them going and continue to make profits for their operators. The Ponzi scheme promises above average returns with little risk. In reality , the high rate of return is usually too good to be true.
To keep the scheme going, Ponzi operators often use high-pressure sales tactics and fraudulently solicit investors through mailings, newspaper ads and cold calls. The fraudsters often provide false documentation to convince potential investors of the legitimacy of the investment opportunity. In some cases, the operators may use a legitimate business as a front for their scheme.
If a scheme does not generate enough new investors, or if the scheme comes under scrutiny from regulators, the scheme unravels and leaves investors happy. Ponzi schemes commonly collapse when its promoters fail to recruit sufficient investors to sustain the operation.
Ponzi schemes can be extremely hard to identify and differentiate from legitimate investments. Investors should do their due diligence and research any investment opportunity carefully. It is also important to be aware of the common red flags of Ponzi schemes, including high returns with little risk, overpresentation of the investment opportunity and an operator who lacks documented experience in the investment field.
The SEC works hard to identify and take action against Ponzi schemes. Investors who have been caught up in a Ponzi scheme are encouraged to contact the SEC to report the fraud. The SEC is committed to protecting investors and helping to return money to the victims of these scams.
