Ponzi scheme

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1920 photo of Charles Ponzi, the namesake of the scheme, while still working as a businessman in his office in Boston



The scheme is named after Charles Ponzi,[2] who became notorious for using the technique in 1920.[3] The idea, present in novels (for example, Charles Dickens' 1844 novel Martin Chuzzlewit and 1857 novel Little Dorrit each described such a scheme),[4] was actually performed in real life by Ponzi who with his operation took in so much money that it was the first to become known throughout the United States. Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors' money to make payments to earlier investors and himself.[1]


Typically, extraordinary returns are promised on the original investment[5] and vague verbal constructions such as "hedge futures trading", "high-yield investment programs", or "offshore investment" might be used. The promoter sells shares to investors by taking advantage of a lack of investor knowledge or competence, or using claims of a proprietary investment strategy which must be kept secret to ensure a competitive edge.


A wide variety of investment vehicles or strategies, typically legitimate, have become the basis of Ponzi schemes. For instance, Allen Stanford used bank certificates of deposit to defraud tens of thousands of people. Certificates of deposit are usually low-risk and insured instruments, but the Stanford CDs were fraudulent.[6]

Initially the promoter will pay out high returns to attract more investors, and to lure current investors into putting in additional money. Other investors begin to participate, leading to a cascade effect. The "return" to the initial investors is paid out of the investments of new entrants, and not out of profits.


Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, in exchange for higher returns. The promoter sees new cash flows as investors are told they cannot transfer money from the first plan to the second. 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.

Unraveling of a Ponzi scheme[edit]

When a Ponzi scheme is not stopped by the authorities, it sooner or later falls apart for one of the following reasons:[1]

  1. The promoter vanishes, taking all the remaining investment money (which excludes payouts to investors already made).

Similar schemes[edit]

    • 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.

See also[edit]


  1. ^ a b c d "Ponzi Schemes – Frequently Asked Questions". U.S Securities and Exchange Commission. U.S Securities and Exchange Commission. Retrieved 23 June 2012. 
  2. ^ "Ponzi Schemes". US Social Security Administration. Retrieved 24 December 2008. 
  3. ^ Peck, Sarah (2010), Investment Ethics, John Wiley and Sons, p. 5, ISBN 978-0-470-43453-6 
  4. ^ Markopolos, Harry; Casey, Frank (2010), No One Would Listen: A True Financial Thriller, John Wiley and Sons, p. 50, ISBN 978-0-470-55373-2 
  5. ^ "What is a Ponzi scheme?". Mijiki. Mijiki.com. Retrieved 23 June 2012. 
  6. ^ Kurdas, Chidem (2012), Political Sticky Wicket: The Untouchable Ponzi Scheme of Allen Stanford 

Further reading[edit]

  • Frankel, Tamar (2012). The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims. USA: Oxford University Press. ISBN 0199926611. 
  • Dunn, Donald (2004). Ponzi: The Incredible True Story of the King of Financial Cons (Library of Larceny) (Paperback). New York: Broadway. ISBN 0-7679-1499-6. 

External links[edit]

  • Ponzi Schemes FAQ Information and advice from the US Securities and Exchange Commission
  • Fraud Awareness and Prevention 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