Ponzi scheme typically refers to any case of known financial fraud or stockbroker misconduct in the form of a particular technique. A Ponzi scheme lures investors with offerings that other investments usually cannot guarantee, such as extremely high, consistent short-term returns.
How Do Ponzi Schemes Work?
This type of financial scheme offers to pay returns to investors from a pool of funds obtained from other investors, or subsequent investors. The system requires a constant stream of money from new investors in order to maintain the appearance of a normal fund. The scam is named after Charles Ponzi, a notorious scam artist who successfully employed the scheme and swindled millions of dollars in the early 1920s.
Charles Ponzi-Ingenious Con ArtistCharles Ponzi is considered one of the greatest con artists in American history. Details of Ponzi's life remain cloudy, due to his propensity to spin illusory tales, but sources agree on a few main points. He was originally born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Italy in 1882.
Having emigrated from Italy to the United States in 1903, he began promising clients a 50% profit within 45 days or 100% profit within 90 days. He claimed to do this by buying discounted international postal coupons and redeeming them in the United States at face value. He also claimed that profits were based on arbitrage. In actuality, this was not the case. The funds were utilized to pay other investors and for Ponzi's private estate and lifestyle.
The Very First "Ponzi Scheme"
Charles Ponzi did not actually invent the scheme. He was likely inspired by William F. Miller, who originally used the same system to take in an estimated one million dollars in 1899. However Ponzi's operation was so successful that his name became synonymous with the swindle.