Named after the famed swindler Charles Ponzi, Ponzi Schemes involve paying investors extremely high returns on their investmet out of the money brought in by new investors.
Named for famed swindler Charles Ponzi, who in the early 1900’s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors.
Ponzi’s business began as an international arbitrage scheme involving international reply coupons. Eventually, Ponzi had to funnel the money brought in by new investors to maintain his lavish lifestyle and satisfy initial investors who had been promised high returns on their investment.
Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors did not get their promised returns.
Ponzi schemes take many forms. One of the more popular Ponzi or pyramid schemes is known as The Airplane. The Airplane consists of, you guessed it, a pyramid consisting of 8 passengers, 4 flight attendants, 2 co-pilots, and 1 pilot. When you join this scheme, you pay an entry fee. You must then recruit 8 new people. Once you do this, you become a flight attendant. Your new people must then each recruit 8 new passengers. You are, of course, promised the chance to make lots of money.
Chain letters are another common Ponzi scheme. These letters ask the recipient to send money to a number of people on a list that is received with the letter. You then add your name to the bottom of the list. Next, you send out a similar letter hoping that other people will respond. Naturally, these letters appeal to our sense of greed, promising vast wealth for little effort.
For example, certain groups that call themselves “gift parties” require that everyone who joins donate $4,000. All the cash goes to the person who is at the “top.” You are told that as soon she has received a certain amount of money, she will step down and nominate the next person to be on top.
Ponzi schemes are illegal no matter what form they make take. Chain letters are probably even more illegal because they involve the United States (or whatever country you may be in) Postal Service, thus inviting mail fraud charges as well as the felony charge for running the Ponzi scheme.
Ponzi schemes are very easy to avoid, but it requires the knack of avoiding a get rich quick mentality. Anybody that promises you lots of money for doing virtually nothing is most likely up to a scam. If the “only” things you need to do is pay your membership fee and recruit a few new members, then you are most likely looking at a Ponzi scheme.