![Charles Ponzi](https://upload.wikimedia.org/wikipedia/commons/6/66/Charles_Ponzi.jpg)
A Ponzi scheme (, ) is a form of
fraud
In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
that lures
investor
An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s and pays
profits to earlier investors with
funds
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
from more recent investors.
Named after Italian businessman
Charles Ponzi
Charles Ponzi (, ; born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi; March 3, 1882 – January 15, 1949) was an Italian swindler and con artist who operated in the U.S. and Canada. His aliases included ''Charles Ponci'', ''Carlo'', and ''Cha ...
, the scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.
Some of the first recorded incidents to meet the modern definition of the Ponzi scheme were carried out from 1869 to 1872 by
Adele Spitzeder
Adelheid Luise "Adele" Spitzeder (; 9 February 1832 – 27 or 28 October 1895), also known by her stage name Adele Vio, was a German actress, folk singer, and con artist. Initially a promising young actress, Spitzeder became a well-known private ...
in
Germany
Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
and by
Sarah Howe
Sarah Howe (born 1983) is a Chinese–British poet, editor and researcher in English literature. Her first full poetry collection, '' Loop of Jade'', won the T. S. Eliot Prize and the ''Sunday Times'' / Peters Fraser & Dunlop Young Writer of ...
in the United States in the 1880s through the "Ladies' Deposit". Howe offered a solely female clientele an 8% monthly
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
and then stole the money that the women had invested. She was eventually discovered and served three years in prison.
[Zuckoff, Mitchell. ''Ponzi's Scheme: The True Story of a Financial Legend''. Random House: New York, 2005. ()] The Ponzi scheme was also previously described in novels;
Charles Dickens
Charles John Huffam Dickens (; 7 February 1812 – 9 June 1870) was an English writer and social critic. He created some of the world's best-known fictional characters and is regarded by many as the greatest novelist of the Victorian e ...
's 1844 novel ''
Martin Chuzzlewit
''The Life and Adventures of Martin Chuzzlewit'' (commonly known as ''Martin Chuzzlewit'') is a novel by Charles Dickens, considered the last of his picaresque novels. It was originally serialised between 1842 and 1844. While he was writing it ...
'' and his 1857 novel ''
Little Dorrit
''Little Dorrit'' is a novel by Charles Dickens, originally published in serial form between 1855 and 1857. The story features Amy Dorrit, youngest child of her family, born and raised in the Marshalsea prison for debtors in London. Arthur Cl ...
'' both feature such a scheme.
In the 1920s,
Charles Ponzi
Charles Ponzi (, ; born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi; March 3, 1882 – January 15, 1949) was an Italian swindler and con artist who operated in the U.S. and Canada. His aliases included ''Charles Ponci'', ''Carlo'', and ''Cha ...
carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate
arbitrage
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
of
international reply coupon
An international reply coupon (IRC) is a coupon that can be exchanged for one or more postage stamps representing the minimum postage for an unregistered priority airmail letter of up to twenty grams sent to another Universal Postal Union (UPU) m ...
s for postage stamps, but he soon began diverting new investors' money to make payments to earlier investors and to himself.
Unlike earlier similar schemes, Ponzi's gained considerable press coverage both within the United States and internationally both while it was being perpetrated and after it collapsed – this notoriety eventually led to the type of scheme being named after him.
Characteristics
In a Ponzi scheme, a
con artist
A confidence trick is an attempt to defraud a person or group after first gaining their trust. Confidence tricks exploit victims using their credulity, naïveté, compassion, vanity, confidence, irresponsibility, and greed. Researchers have def ...
offers
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
s that promise very high returns with little or no risk to their victims. The returns are said to originate from a business or a secret idea run by the con artist. In reality, the business does not exist or the idea does not work. The con artist pays the high returns promised to their earlier investors by using the money obtained from later investors. Instead of engaging in a legitimate business activity, the con artist attempts to attract new investors to make the payments that were promised to earlier investors. The operator of the scheme also diverts clients' funds for the operator's personal use.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes collapse.
[ ] As a result, most investors end up losing all or much of the money they invested. In some cases, the operator of the scheme may simply disappear with the money.
Red flags
According to the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC), many Ponzi schemes share characteristics that should be "
red flags" for investors.
* High investment returns with little or no risk. Every investment carries some degree of
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
, and investments yielding higher returns typically involve more risk. Any "guaranteed" investment opportunity should be considered suspect.
* Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. An investment that continues to generate regular positive returns regardless of overall market conditions is considered suspicious.
* Unregistered investments. Ponzi schemes typically involve investments that have not been registered with
financial regulators
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
(like the
SEC or the
FCA FCA may refer to:
Arts
* Federation of Canadian Artists
* Foundation for Contemporary Art, in Ghana
* Foundation for Contemporary Arts, in the United States
Business and economics
* False Claims Act, a United States federal law
* Federal Cus ...
). Registration is important because it provides investors with access to key information about the company's management, products, services, and finances.
* Unlicensed sellers. In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, federal and state securities laws require that investment professionals and their firms be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
* Secretive or complex strategies. Investments that cannot be understood or on which no complete information can be found or obtained are considered suspicious.
* Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
* Difficulty receiving payments. Investors should be suspicious of cases where they don't receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
According to criminologist Marie Springer, the following red flags can also be of relevance:
* The sales personnel or adviser are overly pushy or aggressive.
* The initial contact took place by a
cold call
Cold calling is the solicitation of business from potential customers who have had no prior contact with the salesperson conducting the call. It is an attempt to convince potential customers to purchase either the salesperson's product or servic ...
or through a
social network
A social network is a social structure made up of a set of social actors (such as individuals or organizations), sets of dyadic ties, and other social interactions between actors. The social network perspective provides a set of methods for an ...
, a language-based radio or a
religious radio
Religious broadcasting, sometimes referred to as faith-based broadcasts, is the dissemination of television and/or radio content that intentionally has religious ideas, religious experience, or religious practice as its core focus. In some coun ...
advertisement.
* The client cannot determine the actual trades or investments that have been carried out.
* The clients are asked to write checks with a different name than the name of the corporation (such as an individual) or to send checks to a different address than the corporate address.
* Once the
maturity date
Maturity or immaturity may refer to:
* Adulthood or age of majority
* Maturity model
** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization
* Development ...
of their investment arrives, clients are pressured to
roll over
Rollover or roll over may refer to:
Arts and entertainment
* ''Rollover'' (film), a 1981 American political thriller
*''Roll Over'', a 1992 album by Hound Dog
* "Roll Over", a 2006 song by Zico Chain
* "Roll Over", a 1989 song by Steven Wayne ...
the principal and the profits.
Methods
Typically, Ponzi schemes require an initial investment and promise above-average returns. They use vague verbal guises such as "
hedge
A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoini ...
futures trading
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
", "
high-yield investment program
A high-yield investment program (HYIP) is a type of Ponzi scheme, an investment scam that promises unsustainably high return on investment by paying previous investors with the money invested by new investors.
Mechanics
Operators generally se ...
s", or "
offshore investment
Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are used to pay less tax in many countries by large and small-scale investors. Poorly regulated offshore domiciles have ser ...
" to describe their income strategy. It is common for the operator to take advantage of a lack of investor knowledge or competence, or sometimes claim to use a proprietary, secret investment strategy to avoid giving information about the scheme.
![Ponzi1920](https://upload.wikimedia.org/wikipedia/commons/0/0e/Ponzi1920.jpg)
The basic premise of a Ponzi scheme is "
to rob Peter to pay Paul
"To rob Peter to pay Paul", or other versions that have developed over the centuries such as "to borrow from Peter to pay Paul", and "to unclothe Peter to clothe Paul", are phrases meaning to take from one person or thing to give to another, espec ...
". Initially, the operator pays high returns to attract investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The schemer pays a "return" to initial investors from the investments of new participants, rather than from genuine profits.
Often, high returns encourage investors to leave their money in the scheme, so that the operator does not actually have to pay very much to investors. The operator simply sends statements showing how much they have earned, which maintains the deception that the scheme is an investment with high returns. Investors within a Ponzi scheme may face difficulties when trying to get their money out of the investment.
Operators also try to minimize withdrawals by offering new plans to investors where money cannot be withdrawn for a certain period of time in exchange for higher returns. The operator sees new cash flows as investors cannot transfer money. If a few investors do wish to withdraw their money in accordance with the terms allowed, their requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent and financially sound.
Ponzi schemes sometimes begin as legitimate investment vehicles, such as
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
s that can easily degenerate into a Ponzi-type scheme if they unexpectedly lose money or fail to legitimately earn the returns expected. The operators fabricate false returns or produce fraudulent audit reports instead of admitting their failure to meet expectations, and the operation is then considered a Ponzi scheme.
A wide variety of investment vehicles and strategies, typically legitimate, have become the basis of Ponzi schemes. For instance,
Allen Stanford
Robert Allen Stanford (born March 24, 1950) is an American financial fraudster, former financier, and sponsor of professional sports. He is serving a 110-year federal prison sentence, having been convicted in 2012 of fraud, on charges that his i ...
used bank
certificates of deposit
A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions in the United States. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, th ...
to defraud tens of thousands of people. Certificates of deposit are usually low-risk and insured instruments, but the Stanford certificates of deposit were fraudulent.
Unraveling
Theoretically, it is possible for certain Ponzi schemes to ultimately "succeed" financially, at least so long as a Ponzi scheme was not what the promoters were initially intending to operate. For example, a failing hedge fund reporting fraudulent returns could conceivably "make good" its reported numbers, for example by making a successful high-risk investment. Moreover, if the operators of such a scheme are facing the likelihood of imminent collapse accompanied by criminal charges, they may see little additional "risk" to themselves in attempting to cover their tracks by engaging in further illegal acts to try and make good the shortfall (for example, by engaging in
insider trading
Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider information ...
). Especially with investment vehicles like hedge funds that are regulated and monitored less heavily than other investment vehicles such as mutual funds, in the absence of a
whistleblower
A whistleblower (also written as whistle-blower or whistle blower) is a person, often an employee, who reveals information about activity within a private or public organization that is deemed illegal, immoral, illicit, unsafe or fraudulent. Whi ...
or accompanying illegal acts, any fraudulent content in reports is often difficult to detect unless and until the investment vehicles ultimately collapse.
Typically, however, if a Ponzi scheme is not stopped by authorities it usually falls apart for one or more of the following reasons:
# The operator vanishes, taking all the remaining investment money. Promoters who intend to abscond often attempt to do so as returns due to be paid are about to exceed new investments, as this is when the investment capital available will be at its maximum.
# Since the scheme requires a continual stream of investments to fund higher returns, if the number of new investors slows down, the scheme collapses as the operator can no longer pay the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing). Such
liquidity crises often trigger panics, as more people start asking for their money, similar to a
bank run
A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
.
# External market forces, such as a sharp decline in the economy, can often hasten the collapse of a Ponzi scheme (for example, the
Madoff investment scandal
The Madoff investment scandal was a major case of stock and securities fraud discovered in late 2008. In December of that year, Bernie Madoff, the former NASDAQ chairman and founder of the Wall Street firm Bernard L. Madoff Investment Securities ...
during the
market downturn of 2008), since they often cause many investors to attempt to withdraw part or all of their funds sooner than they had intended.
Sometimes, two or more of the aforementioned factors may be at play. For example, news of a police investigation into a Ponzi scheme may cause investors to immediately demand their money, and in turn cause the promoters to flee the jurisdiction sooner than planned (assuming they intended to eventually abscond in the first place), thus causing the scheme to collapse much faster than it ultimately would have been closed down by the police if their investigation had simply been permitted to run its course.
Actual losses are extremely difficult to calculate. The amounts that investors thought they had were never attainable in the first place. The wide gap between "money in" and "fictitious gains" make it virtually impossible to know how much was lost in any Ponzi scheme.
Similar schemes
Pyramid scheme
A
pyramid scheme
A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly im ...
is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes:
* In a Ponzi scheme, the schemer acts as a "hub" for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. Failure to recruit typically means no investment return.
* A Ponzi scheme claims to rely on some esoteric investment approach, and often attracts well-to-do investors, whereas pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
* A pyramid scheme typically collapses much faster because it requires exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive (at least in the short-term) simply by persuading most existing participants to reinvest their money, with a relatively small number of new participants.
Crypto Ponzi scheme
Cryptocurrencies
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank
A bank is a financial i ...
have been employed by scammers attempting a new generation of Ponzi schemes. For example, misuse of
initial coin offering
An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cr ...
s, or "ICOs", has been one such method,
known as "''smart Ponzis''" per the ''
Financial Times
The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
''.
The novelty of ICOs means that there is currently a lack of regulatory clarity on the classification of these financial devices, allowing scammers wide leeway to develop Ponzi schemes using these pseudo-assets. Also, the pseudonymity of cryptocurrency transactions can make it much more difficult to identify and take legal action (whether civil or criminal) against perpetrators. The May 2022 collapse of
TerraUSD
Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. The project was created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. It is most known for its Terra stablecoin and the associa ...
, a
stablecoin
Stablecoins are cryptocurrencies where the price is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency.
In theory, the p ...
propped up by a complex algorithmic mechanism offering 20% yields, was described as "Ponzinomics" by
''Wired''. In September 2022,
Jamie Dimon
James Dimon (; born March 13, 1956) is an American billionaire businessman and banker who has been the chairman and chief executive officer of JPMorgan Chase – the largest of the big four American banks – since 2005. Dimon was previously on ...
, CEO of JPMorgan, described cryptocurrencies as "Decentralised Ponzi Schemes".
Economic bubble
Economic bubble
An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
s are also similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant until inevitable collapse. A bubble involves ever-rising prices in an
open market
The term open market is used generally to refer to an economic situation close to free trade. In a more specific, technical sense, the term refers to interbank trade in securities.
In economic theory
Economists judge the "openness" of markets a ...
(for example
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
,
housing
Housing, or more generally, living spaces, refers to the construction and assigned usage of houses or buildings individually or collectively, for the purpose of shelter. Housing ensures that members of society have a place to live, whether it ...
, cryptocurrency,
tulip bulbs, or the
Mississippi Company
The Mississippi Company (french: Compagnie du Mississippi; founded 1684, named the Company of the West from 1717, and the Company of the Indies from 1719) was a corporation holding a business monopoly in French colonies in North America and th ...
) where prices rise because buyers bid more, and buyers bid more because prices are rising. Bubbles are often said to be based on the
"greater fool" theory. As with the Ponzi scheme, the price exceeds the
intrinsic value of the item, but unlike the Ponzi scheme:
* In most economic bubbles, there is no single person or group misrepresenting the intrinsic value. A common exception is a
pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operat ...
scheme (typically involving buyers and holders of thinly-traded stocks), which has much more in common with a Ponzi scheme compared to other types of bubbles.
* Ponzi schemes typically result in criminal charges when authorities discover them, but other than pump and dump schemes, economic bubbles do not typically involve unlawful activity, or even
bad faith
Bad faith (Latin: ''mala fides'') is a sustained form of deception which consists of entertaining or pretending to entertain one set of feelings while acting as if influenced by another."of two hearts ... a sustained form of deception whic ...
on the part of any participant. Laws are only broken if someone perpetuates the bubble by knowingly and deliberately misrepresenting facts to inflate the value of an item (as with a pump and dump scheme). Even when this occurs, wrongdoing (and especially criminal activity) is often much more difficult to prove in court compared to a Ponzi scheme. Therefore, the collapse of an economic bubble rarely results in criminal charges (which require proof beyond a
reasonable doubt
Beyond a reasonable doubt is a legal standard of proof required to validate a criminal conviction in most adversarial legal systems. It is a higher standard of proof than the balance of probabilities standard commonly used in civil cases, becau ...
to secure a conviction) and, even when charges are pursued, they are often against corporations, which can be easier to pursue in court compared to charges against people but also can only result in fines as opposed to jail time. The more commonly-pursued legal recourse in situations where someone suspects an economic bubble is the result of nefarious activity is to sue for damages in
civil court
Civil law may refer to:
* Civil law (common law), the part of law that concerns private citizens and legal persons
* Civil law (legal system), or continental law, a legal system originating in continental Europe and based on Roman law
** Private la ...
, where the standard of proof is only
balance of probabilities
In a legal dispute, one party has the burden of proof to show that they are correct, while the other party had no such burden and is presumed to be correct. The burden of proof requires a party to produce evidence to establish the truth of facts ...
and where the plaintiff need not demonstrate ''
mens rea
In criminal law, (; Law Latin for "guilty mind") is the mental element of a person's intention to commit a crime; or knowledge that one's action (or lack of action) would cause a crime to be committed. It is considered a necessary element ...
''.
* In some jurisdictions, following the collapse of a Ponzi scheme, even the "innocent" beneficiaries are liable to repay any gains for distribution to the victims. In this context, "innocent" beneficiaries can include anyone who unwittingly profited without being aware of the fraudulent nature of the scheme, and even charities to which perpetrators often give to relatively generously while a scheme is in operation in an effort to enhance their own profile and thereby "profit" from the resulting positive media coverage. This typically does not happen in the case of an economic bubble, especially if nobody can prove the bubble was caused by anyone acting in bad faith, moreover a person whose own participation in an economic bubble is not particularly notable is not likely to enhance participation in the bubble and thus personally profit by donating to charity.
* Items traded in an economic bubble are much more likely to have an intrinsic value that is worth a substantial proportion of the market price. Therefore, following collapse of an economic bubble (especially one in a commodity such as real estate) the items affected will often retain some value, whereas an investment that is part of a Ponzi scheme will typically be worthless (or very close to worthless). On the other hand, it is much easier to obtain financing for many items that are the frequent subject of bubbles. If an investor trading on
margin
Margin may refer to:
Physical or graphical edges
*Margin (typography), the white space that surrounds the content of a page
*Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust
*Leaf ...
or borrowing to finance investments becomes the victim of a bubble, he or she can still lose all (or a very substantial portion) of his or her investment capital, or even be liable for losses in excess of the original capital investment.
Exit scam
A Ponzi scheme which ultimately terminates with the operator absconding is similar to an
exit scam
An exit scam is a confidence trick where an established business stops shipping orders while receiving payment for new orders. If the entity had a good reputation, it could take some time before it is widely recognized that orders are not shipping ...
. The main difference is that an exit scam does not involve any sort of investment vehicle with the accompanying promised returns. Instead, exit scammers either accept payment for product which they never ship (usually after gaining a reputation for reliably shipping product) or steal funds held in
escrow
An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
on behalf of third parties (the latter often involves the operators of illegal
darknet market
A darknet market is a commercial website on the dark web that operates via darknets such as Tor or I2P. They function primarily as black markets, selling or brokering transactions involving drugs, cyber-arms, weapons, counterfeit currency, stole ...
s that facilitate the sale of illicit goods and services).
Related concepts
Ponzi finance
The term "ponzi finance" generally designates non-sustainable patterns of
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, such as borrowers who can only meet their
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
commitment if they continuously obtain new sources of financing, often at an accelerating pace and/or ever-increasing interest rates until the borrower cannot secure more financing at any interest rate and becomes insolvent. The term was first coined by economist
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research att ...
.
Ponzi game
In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, the term "ponzi game" designates a hypothesis where a government continuously defers the repayment of its
public debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
by issuing new debt: each time its existing debt arrives at maturity, it borrows funds from new and/or existing lenders in order to repay its existing debt.
Ponzi schemes in fiction
* The "Golconda Gold Bond and Investment Company" in the latter part of the
O. Henry short story ''A Tempered Wind'' from the collection ''The Gentle Grafter'' (1908) is a Ponzi scheme, albeit with an unusual outcome.
The Gentle Grafter
at Project Gutenberg
Project Gutenberg (PG) is a Virtual volunteering, volunteer effort to digitize and archive cultural works, as well as to "encourage the creation and distribution of eBooks."
It was founded in 1971 by American writer Michael S. Hart and is the ...
* In Season 3 of ''Downton Abbey'', Robert Crawley, resisting efforts to modernize the Downton estate, suggests instead to raise capital through investment. He has heard of "a chap in America" named Charles Ponzi "who offers a ''huge'' return after ninety days." This idea is immediately shot down by other Crawley family members.
* In Season 8 of ''Two and a Half Men'', Alan Harper orchestrates a Ponzi scheme by borrowing money from his family for a business idea he has regarding placing ads for his chiropractor practice. Realizing that it's easier to simply pay them back using new money he can raise from others, he never follows through on his original idea and simply scams everybody.
*In Season 1 of ''Boardwalk Empire'', the boyfriend of Annabelle is visibly nervous throughout episode 11 ( Paris Green), and eventually confesses the he lost all his money to Charles Ponzi and is now completely broke. Given the timeframe of the series, it can be assumed he lost the money in the original Ponzi Scheme.
See also
* ''Billionaire Boys Club''
* Black Friday (1869)
The Black Friday gold panic of September 24, 1869 was caused by a conspiracy between two investors, Jay Gould and his partner James Fisk, and Abel Corbin, a small time speculator who had married Virginia (Jennie) Grant, the younger sister of Pr ...
, also referred to as the ''Gold Panic of 1869''
* Bucket shop (stock market)
A bucket shop is a business that allows gambling based on the prices of stocks or commodities. A 1906 U.S. Supreme Court ruling defined a ''bucket shop'' as "an establishment, nominally for the transaction of a stock exchange business, or busine ...
* Chain letter
A chain letter is a message that attempts to convince the recipient to make a number of copies and pass them on to a certain number of recipients. The "chain" is an exponentially growing pyramid (a tree graph) that cannot be sustained indefinite ...
* Football Index
* Gary Sorenson
Gary Allen Sorenson (born 1943 in Calgary, Alberta) is a Canadian businessman who was arrested at Calgary International Airport on September 29, 2009 for an alleged role in a Ponzi scheme that scammed investors of more than C$300 million, the la ...
* Get-rich-quick scheme
A get-rich-quick scheme is a plan to obtain high rates of return for a small investment. The term "get rich quick" has been used to describe shady investments since at least the early 20th century.
Most schemes create an impression that partic ...
* ''Hustle'' (TV series)
* List of Ponzi schemes
This is a list of Ponzi schemes, fraudulent investment operations that pay out returns to investors from money paid in by subsequent investors rather than from any actual profit earned from the operation of a business.
Historical examples
19 ...
* Matrix scheme
A matrix scheme (also known as a matrix sale or site, and as a hellevator, excavator or ladder scheme) is a business model involving the exchange of money for a certain product with a side bonus of being added to a waiting list for a product of g ...
* Minsky moment
A Minsky moment is a sudden, major collapse of asset values which marks the end of the growth phase of a cycle in credit markets or business activity.
Description
According to the hypothesis, the rapid instability occurs because long periods ...
* Money multiplier
In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking system. It relates to the ''maximum'' amount of com ...
* Non-fungible token
A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership. The ownership of an NFT is recorded in the b ...
* Saradha Group financial scandal
The Saradha Group financial scandal was a major financial scam and alleged political scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies that was believed to be running collective i ...
* Steven Hoffenberg
Steven Jude Hoffenberg (January 12, 1945 – August 2022) was an American businessman and fraudster. He was the founder, CEO, president, and chairman of Towers Financial Corporation, a debt collection agency, which was later discovered to be a ...
* ''The Wizard of Lies
''The Wizard of Lies'' is a 2017 American television biopic film directed by Barry Levinson and written by Sam Levinson, Sam Baum, and John Burnham Schwartz, based on the 2011 non-fiction book of the same name by Diana B. Henriques. The film star ...
''
* Towers Financial Corporation
Towers Financial Corporation was a debt collection agency based in Manhattan.Allan Sloan (February 16, 1993)"THE SEC VS. STEVEN HOFFENBERG: A CASE OF LEANING FORTUNES AT TOWERS FINANCIAL?,"''The Washington Post''. Between 1988 and 1993, Towers Fina ...
* White-collar crime
The term "white-collar crime" refers to financially motivated, nonviolent or non-directly violent crime committed by individuals, businesses and government professionals. It was first defined by the sociologist Edwin Sutherland in 1939 as "a ...
* United States Postal Inspection Service
The United States Postal Inspection Service (USPIS), or the Postal Inspectors, is the law enforcement arm of the United States Postal Service. It supports and protects the U.S. Postal Service, its employees, infrastructure, and customers by enfor ...
Notes, references and sources
Notes
References
Sources
*
*
*
*
*
*
*
*
External links
*
Ponzi Schemes FAQ
Information and advice from the US Securities and Exchange Commission
Information about spotting fraud from the US Commodities Futures Trading Commission
Ponzimonium
Free e-book about Ponzi schemes from the US Commodity Futures Trading Commission
{{Authority control
Confidence tricks
Charles Ponzi