Problems: Ponzi Scheme

A Ponzi scheme is a type of investment scam that affects the Worker Class because of its attractive and easy appearances.

It promises high returns with little or no risk to investors.

Instead of generating profits through legitimate investments or business activities, the scheme uses money from new investors to pay returns to earlier investors.

The usual ingredients for this kind of scam are:

• The ponzi operator attracts new investors with promises of high returns, often much higher than normal investments like stocks or bonds
• Early investors receive the promised returns, which are actually paid from the money contributed by newer investors, not from profits generated by the investments
• To keep the scheme running, the operator needs to continually recruit new investors to deposit money which will be used to pay returns to earlier investors

Eventually, the scheme collapses when the operator:

• can no longer recruit enough new investors.
• runs off with the remaining funds.

History of the Ponzi Scheme

It is named after Charles Ponzi, an Italian-born swindler who became infamous for starting this scam in 1919 in the United States.

• He promised high returns at 50% profit in 45 days by arbitrage in international postal reply coupons.
• He claimed that he could buy these coupons cheaply in one country and redeem them for a higher value in another country.

But Ponzi was really using money from new investors to pay the returns of earlier investors.

Ponzi’s scheme attracted millions of dollars, and at its peak, he was taking in an estimated $250,000 per day (equivalent to about $3.5 million today).

However, when investigative journalists and regulators began looking into his activities, it was revealed that there were no legitimate investments.

Ponzi was arrested, and his scheme collapsed, leaving most investors with nothing.

Modern Ponzi Schemes

Bernie Madoff’s scheme in the early 2000s is a major Ponzi scheme which defrauded investors of billions of dollars.

Other more common examples are cryptocurrency scams and multilevel marketing (MLM) schemes.