What is a Ponzi scheme?

You hear about a Ponzi scheme and you know people have lost money but do you know exactly what it is?

You can define a Ponzi scheme as a fraudulent investment operation. This operation pays returns to each investor from thier own money that they have put in or by subsequent investors. There is no actual profit earned.

Why would people invest? The Ponzi scheme will offer higher then usual returns on short-term investments. It appears that everything is on the up-and-up as long as there is money flowing in from new investors.

Why is it called a Ponzi scheme. The nefarious Charles Ponzi became famous when he used this technique in early 1920. Ponzi became known throughout the United States when his scheme based on arbitraging international reply coupons for postage stamps quickly became a cycle of taking the money being invested to pay earlier investors and, of course, Ponzi.

How does do the authorities catch a person perpetuating a Ponzi system? It will usually occur because of a complaint or if the promoter is selling unregistered securities. These systems are designed to collapse under its own weight because the earnings will always be less then payments to the investors. It means that more and more people have to be drawn into the scheme to keep the payments coming in.

The largest financial investor fraud in history was committed by a single person. Bernard Madoff ran a Ponzi scheme to foll both the individual and institutional investors and the securities authorities. The total lost stands at $64.8 billion.

If you have lost money in a Ponzi scheme then sometimes there is some government bail outs. Usually these are directed to the corporate world and the regular mom and pop situation receives no help for the lifetime of savings lost.