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What is a Ponzi scheme?

On Behalf of | Nov 9, 2022 | Criminal Law

There are all kinds of fraudulent scams: pump-and-dump scams, adoption fraud, money mules and ransomware, for example. Investment schemes are easy to fall for when people are promised easy returns.

One well-known scam, dating back to the 1920s, is called a Ponzi scheme, named after Charles Ponzi himself, an affluent con man. Here’s what you should know:

How did the first Ponzi scheme work?

Originally, Ponzi would use the postal service, by buying stamps in bulk, to take advantage of the fluctuating postal prices. In other words, a stamp could be bought for a low price and sold for a higher price, theoretically producing a profit.

To start the scam, Ponzi would get people to invest in his scheme by promising a return on the investments. However, Ponzi’s scam began to unravel when his postal scam didn’t profit how it should have.

As a result, he wasn’t able to pay back early investors, so, he did the next logical step and paid back old clients with the money from new clients. Because of this, he appeared to hold his word and more people started to invest in his scam. Eventually, fewer people were investing in the scam and it was eventually uncovered how Ponzi was paying back investors.

Despite the backlash toward the first Ponzi scheme, many people still run fraudulent investment schemes, like the pyramid scheme. In many ways Ponzi schemes work like pyramid schemes: Early investors profit from new investors until the scam falls apart when there are no more investors.

Investment schemes often evolve with time. Many investment schemes are now digital and don’t appear as schemes at first. If you’re accused of being involved in an investment scheme, you may need to know your legal rights.