Posted At : March 24, 2009 8:54 AM
Named for Charles A. Ponzi, who defrauded hundreds of investors in the 1920s, a Ponzi scheme pays off old “investors” with money coming in from new “investors.” It works this way:
Example: Investor A (“A”) $1000 on P’s promise to repay $1000 plus $100 “interest” in 90 days. During the 90 days, A makes similar promises to Investors B and C, receiving $1000 each from them. At the end of the first 90 day period, A may offer to pay B and C the $100 “interest” and to return the original $1000. More likely, he will invite B and C to “re-invest” the $1000 plus the $100 “interest” for a similar, or higher, return at the end of another 90 days. Thereafter, Baand C, believing he or she can receive a good return on the investment, is likely to bring other investors to A.
In this manner A collects a pool of money that he can use to pay out to those few wishing return of their money. A may operate his scheme for some time before “pulling the plug” – that is, either disappearing with all the “investments” or revealing the bad news that the investments went “sour.” A major factor in the eventual collapse of a Ponzi scheme is that there is no significant source of “income” other than from new investors.
Regards – Keith Springer