About Ponzi Scheme

In 2013, Indians roared with anger and shock when the news Saradha scam followed by the Rose Valley chit fund scam came into the rounds. As per reports, more than 17,000 crores of money came to be duped by these scams. How did these scams occur? The thing that is common between both the scam is the foundation and the way it was conducted. These scams are categorized under the category of Ponzi schemes. So what are Ponzi Schemes? Why is a Ponzi Scheme named so? How to recognize a Ponzi Scheme? Read this blog further to answer all of your questions regarding Ponzi Schemes.

What is a Ponzi Scheme?

A Ponzi Scheme is a form of fraudulent practice that lures the investors to invest in the scheme for promised profits from a legitimate business. But in reality, one investor is paid off by the money of another investor, and the other investor is paid from the money invested by the third investor, and so on.

The investors are made to believe that these profits that the company has earned are from a legitimate source, but they are unaware that their money is coming from other investors. This illusion is maintained by signing up new investors and the other investors do not seek full repayment by believing the existence of assets that they are made to believe exists from the fictitious company created by the schemer. 

Ponzi Scheme: Why is it named so?

In 1919, a man named Charles Ponzi duped thousands of investors by focusing on the pre-purchase of international postage reply coupons that were just introduced by the US Postal Service back then. Using these coupons, the user could go to the local post office and exchange them for priority postage stamps that were needed to pay for sending the reply. Due to the foreign exchange rate fluctuations, it was not rare to find pricier coupons in one country over another and Ponzi took the opportunity of these fluctuations and purchased cheaper coupons, and then Ponzi sold these coupons at the costlier rates and earned the arbitrage profit. However, he grew greedy and expanded his operations.

Ponzi promised a 50% return within 45 days and a 100% return in 90 days on profits earned by these international reply coupons. By the success of his postage stamps business, no one doubted his skills. So people poured in the money as he registered this scheme in the Securities Exchange Company of the United States of America. The money that he received, was never invested by Ponzi. He plowed back the money by paying off some of the investors. This went on for one year. In 1920, SEC was investigated and the fraud came out. 

Importance of the scheme by Charles Ponzi

Compared to today’s extremely skilfully crafted scams, this Ponzi scam was hardly a pine. However, this story is important for not the size of its scam but for the speed, it took to swindle the money. Within just 8 months of the scam, Ponzi made over 15 million dollars by convincing the investors that he will give them high returns.

These types of scams weren’t new and he wasn’t the first one to do it. But this story is famous for the basics of the pyramid scheme it followed— taking the money from a new investor to pay an old investor. This made the world carry on to categorize these types of swindles by the name of Ponzi. 

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Value of Scam

Jean Pierre Van Rossem



$860 Million 

Ioan Stoica



$1-5 Billion

Sergei Mavrodi



$10 Billion

Gerald Payne



$500 Million

Joel Steigner



$1 Million

Tom Petters



$3.6 Million

Bernie Madoff



$65 Million

Allen Stanford



$7 Million

The Common Characteristics of Ponzi Schemes around the Globe

In order to be safe from Ponzi Schemes, it is important to recognize one. That would be the first and the only step. The following are the biggest giveaway characteristics of a Ponzi scheme:

  1. A guaranteed Profit which is abnormally high and has comparatively low risk than it should carry at that much amount of returns
  2. Consistency in the flow of returns even during the downfalls in economic conditions
  3. Schemes and Investment Instruments not registered with the National Authorities like SEBI in India, SEC in the USA, etc.
  4. Investment strategies that are “too complicated” or “extremely complex” to understand for the investors
  5. Official paperwork is not allowed to be seen by the clients
  6. Withdrawal of money is extremely difficult

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