Be careful about the Ponzi scheme!

A Ponzi scheme is a fraudulent business operation that promises investors high returns on investment with little risk. Projected returns over 50% are sometimes offered to entice one to invest. In this article, we learn more about this fraudulent business.



  • Who is Charles Ponzi?
  • What is a Ponzi Scheme?
  • How to Breaking Down Ponzi Schemes?
  • 4 common Ponzi scheme attributes

Who is Charles Ponzi?

Charles Ponzi was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi on March 3, 1882, in the town of Lugo in northern Italy. Ponzi later claimed that his parents, Oreste and Imelda Ponzi, belonged to a wealthy Italian family that had fallen into extreme poverty by the time he was born. It is said that Ponzi was a troublemaker from a young age, stealing from his parents and even parish priests.

In 1920, Ponzi established Securities Exchange Co., where he sold stock (promissory notes) with an advertised interest rate of 50% after 90 days. Instead of purchasing IRCs that could be redeemed in the United States with the funds obtained from investors, Ponzi used funds obtained from new investors to repay previous investors.

Ponzi blamed the Universal Postal Union for suspending the sale of IRCs once it learned about his coupon redemption scheme to explain why he did this. Ponzi moved on to his “Rob Peter to pay Paul” scheme after attempting to avoid suspension. It worked for a while. He made $15 million in the first eight months of 1920 or $220 million in 2022 dollars. He told investors that he had developed a complex network of agents who would buy IRCs for him in other countries and redeem them for him in the United States at a hefty profit. There was not a complex community of coupon buyers; He was repaying previous investors with new investments.

He was eventually found guilty of mail fraud on federal charges and sentenced to 3½ years in prison. He was found guilty of state charges while on parole, jumped bail, was caught, and spent another year in prison before being released in 1934. He had never become a U.S. citizen when he was deported to Italy at that time. Although it is known that he passed away on January 18, 1949, in a charity hospital in Rio de Janeiro, leaving only $75 to pay for his burial, his history in Brazil and Italy is not well documented.

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What is a Ponzi Scheme?

A fraudulent investment scheme is known as a Ponzi scheme. It involves repaying previous investors with funds obtained from new investors. Typically, the people who set up Ponzi schemes say that they will invest the money they get and make supernormal profits with little to no risk.

However, the con artists do not intend to invest the funds. To make the scheme appear plausible, they intend to repay the early investors. As a result, a Ponzi scheme can’t survive without a steady stream of money. The plan collapses when the organizers are unable to recruit additional members or when a large number of existing investors decide to withdraw their funds.


How to Breaking Down Ponzi Schemes?

Simply put, a Ponzi scheme is a type of investment fraud in which investors are promised significant returns. Participating businesses in Ponzi schemes concentrate entirely on acquiring new customers. The money from the newcomers’ investments is used to repay the original investors as “returns.”

A pyramid scheme, on the other hand, is not the same as a Ponzi scheme. In a Ponzi scheme, investors are tricked into thinking that their investments are paying off. Participants in a pyramid scheme, on the other hand, are aware that the only way they can make money is by bringing in more people to the scheme. Ponzi schemes are primarily investment ruses.

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4 common Ponzi scheme attributes

  • The promise of high returns with minimal risk

It’s probably too good to be true if someone offers an investment with few risks and high returns. The investor probably won’t get any money back.

  • Overly constant returns

Every day, there are changes in investments. For instance, when one invests in the shares of a particular company, there will be times when the price of those shares will rise and other times when it will fall. However, investments that consistently deliver high returns despite fluctuating market conditions should always be avoided by investors.

  • Unregistered investments

 It is essential to confirm whether the investment company is registered with the U.S. Securities and Exchange Commission (SEC) or state regulators before rushing to invest in a scheme. An investor can access information about the company to determine its legitimacy if it is registered.

  • Sellers without licenses

One must have a specific license or be registered with a regulating body, as required by federal and state law. The majority of Ponzi schemes involve businesses and individuals without licenses.


The Bottom Line

An illegal investment is all that a Ponzi scheme is. The scheme, named after a fraudster from the 1920s by the name of Charles Ponzi, promises steady, high returns with supposedly little risk. Even though such a plan may be successful in the short term, it eventually runs out of money. As a result, investments that appear too good to be true should always be avoided by investors.


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