Chapter 24

Ponzi Schemes

Steven L. Skalak, Regina Lau, and Sherrie Clarke


Ponzi schemes are illegal investment scams that use funds received from subsequent investors to pay returns to earlier investors, rather than distributing revenues generated from any actual business. Promoters of Ponzi schemes often reel in investors by offering high rates of returns over relatively short periods of time. Such scams can continue for some time because of the illusion that investors appear to be getting the returns that they were promised, which in turn encourages new investors to contribute funds and also encourages the reinvestment into the scam by original investors.

Ponzi schemes were named after Charles Ponzi, an Italian immigrant to the United States, who became notorious for using such a scheme to defraud investors. In the 1920s, Ponzi operated an investment scheme though his business, Securities Exchange Co., and promised investors returns of up to 50 percent on the basis of making investments in and arbitraging International Postal Union reply coupons for postage stamps. In theory, at the time it was possible to take advantage of the disparities in international exchange rates and realize huge profits on each transaction. Reply coupons could actually be purchased in Italy for pennies and then converted to postage stamps in the United States worth several times their purchase price. While this business model and its profitability could be demonstrated ...

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