Comprehension of the Ponzi Scheme
A Ponzi scheme is a fraudulent investment scam. This scheme promises high rates of return with low risk for investors. A Ponzi scheme is a fraudulent investment scam that generates returns for early investors with money taken from later investors. It is similar to a pyramid scheme in that both are based on the use of funds from new investors to pay the first investors.
If the fraud is not discovered, it is exposed when it collapses, i.e., when the sums provided by the new entrants are no longer sufficient to cover the clients’ earnings. Let’s imagine that someone proposes an investment with 100% interest: you give him 10 euros; He gives you back 20 euros using the money deposited by the following clients (all he has to do is offer a return of double the known market returns to attract customers and to last). The system is viable as long as the clientele flocks, attracted by the financial promises (and more tempting as the first investors are satisfied and make a great advertisement for the investment). The first clients, so happy with this wonderful investment, put their money back in, adding to all those they have managed to convince. The phenomenon then snowballs, maintained as long as the money is paid in, and makes it possible to pay the new investors 100%. The organizer takes a commission, which is quite understandable when you see the promises he makes and keeps. The system can last as long as demand follows the exponential growth imposed by this system, with customers arriving in 2, 4, 8, 16, 32, etc. When new arrivals become scarce, the dynamic of the chain breaks down, the
bubble bursts: the last and numerous investors are robbed. The rare winners are those who have left the ship on time (and the organizer…).
Charles Ponzi used this system in 1919 in Boston, making him, an anonymous person, a millionaire in six months. Profits were supposed to come from speculation on International postal reply coupons, with a 50% return in 90 days. About 40,000 people invested $15 million, of which only a third was redistributed to them. The concept of the Ponzi scheme did not end in 1920. The Ponzi scheme evolved along with technology. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified transaction reports to show that a client was making a profit on investments that did not exist. Regardless of the technology used in the Ponzi scheme, most Ponzi schemes have similar characteristics:
• a promise of guaranteed high returns with little risk
• A constant flow of returns, regardless of market conditions
• Investments that have not been registered with the Securities and Exchange Commission (SEC)
• Investment strategies that are secretive or described as too complex to explain
• Clients are not authorized to consult the official documents relating to their investment.
• Clients facing difficulties in withdrawing their money
Written on 09/12/2020
