Here are some definitions and some explanations of “Ponzi Scheme” and some matters in the news today.  -GFS


From:  Wikipedia (1-2-09)

A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. The term “Ponzi scheme” is used primarily in the United States, while other English-speaking countries do not distinguish colloquially between this scheme and other pyramid schemes.[1]

The Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi,[2] who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi did not invent the scheme, but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors’ money to support payments to earlier investors and Ponzi’s personal wealth.

Knowingly entering a Ponzi scheme can be rational, in the economic sense, even at the last round of the scheme if a government will likely bail out those participating in the Ponzi scheme.[3]




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From Small Business Notes:




Definition of Ponzi Scheme


The term Ponzi scheme is often misused as a synonym for a pyramid scheme, the essential difference is that Ponzi scheme participants are not offered any direct financial incentive for bringing in other participants. However, they are likely to tell their friends about the investment opportunity. The fact that early participants in a Ponzi scheme are paid off from the monies collected by later participants is normally known only to the operator of the Ponzi scheme. The participants are instead offered a story to explain their high investment returns.

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Another definition and explanation from  

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Ponzi Scheme – Definition and Overview of Ponzi Scheme

By Ken Clark,

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A ponzi scheme is an investment scam where investors are promised, and seemingly delivered, unusually high rates of return.

In a ponzi scheme, the scam artist pools the funds received from victims, living off some and paying a portion back to the investors as interest or gains. The scam artist supplies the victim with false documentation or account statements making it appear as if their investment is still intact and earning an exceptional rate of return.

Naturally, this often encourages investors to sink more money into the ponzi scheme as well as publicize this “great investment” to their friends and other potential investors.

As the ponzi scheme grows, or when a number of investors start requesting the return of their original investment plus its earnings, the scam artist reaches a point where he or she cannot collect enough new money to pay off the old investors. At this point, the ponzi scheme collapses and the authorities become involved.

Pronunciation: pawn-zee

Also Known As: pyramid scheme, chain letters

Common Misspellings: ponzie scheme, ponzy scheme

Examples: A ponzi scheme run by famed Wall Street investor Bernard Madoff scammed investors for over $50 billion dollars before finally collapsing.

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