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Ponzi Scheme

A Ponzi scheme is a type of investment scam often involving no actual merchandise sales or investment securities of any kind and characterized by paying early investors with contributions from new investors to boost their confidence in the scam. The typical Ponzi scheme works like this:

  • The organizer of the Ponzi scheme promises investors unusually high financial returns on their investment;
  • The investors give the organizer money for the supposed business venture which is usually some type of remote enterprise involving diamonds, silver mines, or oil wells;
  • The money received from the new investors goes directly to the early investors and this creates an enthusiasm amongst the early investors;
  • The early investors become excited for the investment opportunity once they receive their profits and immediately start promoting the investment scheme to their friends, family and relatives;
  • The organizer decides when to dissolve the scheme and disappears with all the money generated from the investors.

The scheme continues to operate as long as there is a continual flow of new investors. The Ponzi eventually collapses when there are no investments and no earnings and it becomes difficult to recruit new investors or when the existing investors decide to cash out.

The Ponzi scheme takes its name from Charles Ponzi, who was convicted for fraudulent schemes he conducted in Boston, Massachusetts in the late 1920's. The most famous Ponzi scheme in the modern world was none other than Bernard Madoff who allegedly swindled investors for 50 billion dollars. Bernard Madoff was sentenced to over 150 years in Federal prison for his notorious scam.

Ponzi schemes are illegal in the United States. They are generally prosecuted under federal and state white collar crimes law: pyramid statutes, securities laws, wire & mail fraud statutes, and RICO laws. Ponzi scheme prosecutions are charged as felonies. Conviction for this type of fraud could result in lengthy state prison or county jail sentences, plus restitution to the victims. Consult with an experienced and skilled criminal defense attorney before speaking with law enforcement. See Pyramid Scheme.