July 18, 2024

Many of the offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all available deposit, investment, loan or credit products.
A Ponzi scheme is a form of investment fraud in which current investors are paid from the assets that are collected from new investors. Clearly, the Ponzi scheme is an unsustainable model, as the fraudster will eventually run out of willing investors, and will be unable to pay back those who bought into the scheme at the end.
Read: Looking To Diversify In A Bear Market? Consider These 6 Alternative Investments
The Ponzi scheme is named for Charles Ponzi, a con man who promised investors in the 1920s that he would pay them a 50% return in just a few months. He told them that the investment was in international mail coupons. But rather than investing the money that people gave him, he used it to pay the previous investors their supposed returns.
As with all the subsequent, similar frauds that bore his name, Charles Ponzi’s scheme collapsed when he stopped being able to convince new customers to invest.
All Ponzi schemes have some characteristics in common, making them fairly easy to identify as long as you don’t let your emotions cloud your judgment. Here are some things to ask yourself when evaluating an investment, so you don’t fall victim to a Ponzi scheme.
Is it too good to be true? The old saying, “If it seems too good to be true, it probably is,” is an adage to live by. If someone is promising you high returns for very little risk, be very wary.
Is there a guarantee of a high return? A bank can offer you a guaranteed return on a CD, but it may be 1-2% over 3-5 years. If you’re being offered a “guaranteed” return of 20-40% or more within a relatively short period of time, that’s a red flag.
Can you understand the investment? Warren Buffet famously said he didn’t invest in anything he couldn’t understand. Make sure that you understand what you are investing in, how the investment is structured and how it is able to produce the returns being offered.
Is an unlicensed seller offering an unregistered investment? Investment products are highly regulated in the United States, and for good reason. If the person selling you an investment isn’t licensed, or the investment isn’t registered, it’s risky. You can check to see if the person promoting the investment is registered as a securities broker on Broker Check.
Is the person trying to sell you the investment acting unprofessionally? Are they rushing you to commit, or not answering your questions? Are they making excuses for missing or incorrect account statements? Are they not responding when you ask to withdraw your money? Any one of these behaviors can be an indication that something is just not right.
Most Ponzi schemes are eventually exposed, simply because those who conduct them are typically unable to walk away. The more successful the scheme is, the more they believe that they can continue to defraud people without consequences.
Here are some famous Ponzi schemes.
Charles Ponzi may not have originated the fraud that now bears his name, but he was certainly an early success story. It is estimated that he hustled $15 million — a tidy sum in 1920 — from tens of thousands of Bostonians who couldn’t wait to give him their money. His promises of guaranteed returns of 50% didn’t materialize for most of the investors, mostly because his plan to purchase international postal reply coupons in countries with weak currencies never materialized.
Ponzi was very good at getting investors to give him money, and, when they wanted to get back their big returns, he was even better at getting them to leave the money with him to get even better returns. What finally took him down was a lawsuit for an unpaid debt to a furniture salesman. The local newspaper learned of the suit and, by extension, of Ponzi’s incredible promises, and ran a story on the front page, indicating that Ponzi was offering 50% returns in 45 days.
Crowds rushed to his office, eager to give him their money and share in the promised returns. He was happy to take their money, but it wasn’t long before it became obvious that, even if he had been investing in postal reply coupons, he wouldn’t be able to generate the returns he was promising. Eventually, he was found to be several million dollars in debt, and many investors received 30% or less of their original investment back. He was arrested and convicted of mail fraud and served 3½ years in prison. After his sentence, he was deported back to Italy.
Lou Perlman was the manager of the ’90s boy bands ‘N Sync and the Backstreet Boys, and he defrauded them of millions of dollars when they became multi-platinum recording artists — he eventually settled multi-million-dollar lawsuits with each band. But that wasn’t even the biggest scam he was running. Perlman created a fictional airline, Trans Continental Airlines, and convinced more than 2,000 people to make investments totaling hundreds of millions of dollars. The airline never existed, and Perlman was arrested and sentenced to 25 years in prison for conspiracy, money laundering, and making false statements.
For 20 years, R. Allen Stanford sold investors fake certificates of deposit, ostensibly issued by a bank in Antigua. Almost 30,000 people gave Stanford their money, hoping to reap the high rates of return he promised. But instead of investing their money, he used it to fund his lavish lifestyle. Stanford was arrested in 2008 and, in 2012, was sentenced to 110 years in prison.
Bernie Madoff began his career on Wall Street in the 1960s, but it appears he didn’t start his Ponzi scheme until later. Madoff collected about $20 billion from investors and produced statements indicating that their accounts had swelled to $65 billion before his plan began to collapse.
Like many who run long-time Ponzi schemes, Madoff flew under the radar for quite some time. He not only kept his methods secret, he also tried to keep his clients from talking about his supposed successes. But once his investors thought they were getting huge returns, they couldn’t help bragging to their friends about Madoff, which brought even more willing investors to his door. Eventually, the SEC caught wind of Madoff’s activities and began to investigate. SEC investigators called the scheme “massive” and “a stunning fraud that appears to be of epic proportions.” Ironically, Madoff had once been the chairman of the Nasdaq stock market and often served on advisory panels at the SEC.
Madoff was arrested in 2008 and sentenced to 150 years in prison. He died in 2021.
Ponzi schemes are rarely successful over the long term, simply because they are unsustainable. But that doesn’t stop would-be investors from being lured in by the promise of high returns with little or no risk. Before you make any investment at all, be sure you understand all the terms, and investigate the person you are trusting with your hard-earned assets.
Information is accurate as of Sept. 20, 2022.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
Share This Article:

Sponsored Links by Zergnet Zergnet
Every day, get fresh ideas on how to save and make money and achieve your financial goals.
Advertiser Disclosure: Many of the offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all available deposit, investment, loan or credit products.
Savings Accounts
Checking Accounts
Certificate of Deposit
Money Market Accounts
Credit Unions
Interest Rates
Get Started
Best Savings Accounts
Best Checking Accounts
Best CD Rates
Best Money Market Accounts
Best National Banks
Best Online Banks
Best Regional Banks
Best Credit Unions
Best Bank Promotions
Find The Best Bank For You

Real Estate
Your Strategy
Get Started
Best Online Brokerages
Best Investing Apps
Best Mutual Funds
Best Stocks for Beginners
Best Robo-Advisors
Cheap Stocks to Buy New
Best Cryptocurrency to Buy Now
Next Big Cryptocurrency
Find The Best Bank For You

Social Security
Savings Advice
Get Started
Best IRA Providers
Best Roth IRA Providers
Best 401k Companies
Best 401k Plans
Retire Early
Best Online Banks
Best Regional Banks
Best Credit Unions
Best Bank Promotions
Retirement at Any Age

Credit Cards
News & Advice
Get Started
Best Credit Cards
Best Reward Cards
Best Cash Back Cards
Best Balance Transfer Cards
Check Credit
Raise Credit
Repair Credit
Find The Best Card For You
Live Richer™
Saving Money
Home Tips
Side Gigs
Net Worth
Financial Planning
Get Started
Create a Budget
Tackle Debt
Know Your Net Worth
Find a Side Job
Your Money Champion
Pay off Your Mortgage
Live Richer Podcast
Find The Best Bank For You

Trending Topics
News & Events
Crypto on the Go
Travel Rich
Filing Taxes 2022
Back to School Finances
GEN Z: The Future of Finances
Small Business Spotlight
Financially Savvy Female
Economy Explained
Top Money Experts
GOBankingRates Newsletters
Retirement at Any Age


Sign up for our daily newsletter for the latest financial news and trending topics.
For our full Privacy Policy, click here.


About Author