In the world of consumer protection, there is no fraud more well-known than the Ponzi scheme. Though many of us have heard the term, we may not know exactly what it means. What is a Ponzi scheme?
The U.S. Securities and Exchange Commission (SEC) defines a Ponzi scheme as an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. According to the government website SEC.gov, Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. The organizers spend most of their time looking for new investors to generate the funds necessary to pay earlier investors and to pay their own expenses.
Ponzi schemes almost always collapse because they generate little if any legitimate earnings. A constant flow of money from new investors is required to keep going. When new investors cannot be recruited, or a large number of investors ask to cash out, the scheme collapses.
Ponzi schemes are named after Charles Ponzi, a fraudster who duped thousands of New England residents into investing in a postage stamp speculation scheme in the 1920’s.
Ponzi schemes demonstrate the truth of that old saying: If it sounds too good to be true, it probably is.
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