What is a Ponzi scheme?

August 4, 2022
What is a Ponzi scheme?

If you face federal securities fraud charges in Missouri, this is a very serious matter. A conviction could place you in a federal prison for life, plus the necessity of paying your alleged victims restitution in the amount of hundreds of thousands of dollars.

As money.com explains, numerous types of financial fraud schemes exist, but one of the most notorious is the Ponzi scheme. Named for 1920s Italian immigrant Charles Ponzi, this type of scheme is similar to but different from a pyramid scheme. In Ponzi’s case, it involved international reply coupons.

Ponzi’s scheme

Back in the day, when Americans sent a letter overseas, they could enclose an international reply coupon, a return postage voucher the recipient could use when sending a reply. Ponzi’s scheme consisted of purchasing thousands of these vouchers in foreign countries where they cost less than in America and then selling them to Americans for resale purposes, taking his cut off the top. He promised his “investors” a 50 percent return on their investment within three months.

Ponzi’s get-rich-quick con initially worked because his original “investors” actually made money. The problem came when Ponzi quickly discovered that the mechanics of running this international con were far more expensive than anticipated. The only way Ponzi could pay off his original investors while skimming his profits off the top was to find ever more investors without actually buying the underlying coupons. He used the second round money to pay his original investors, the third round money to pay his second round investors, and on down the line supposedly ad infinitum.

Unfortunately for Ponzi, his scheme fell apart in less than a year. For one thing, the U.S. government became suspicious of how he could buy and sell somewhere around 160 million coupons when only about 27,000 of them existed worldwide. Eventually, the feds busted him and he spent several years in jail.

Bernie Madoff

Nearly 100 years later, Bernie Madoff, a highly respected and successful NASDAQ trader, pulled off the largest Ponzi scheme in American history, successful for more than 20 years. Even the Securities and Exchange Commission could not find a “smoking gun” in his house of cards. He himself confessed to his crimes when, as with all Ponzi schemes, his finally became unsustainable and began falling apart in 2009. In the meantime, he had swindled an estimated $65 billion from his unsuspecting investors, including such well-known celebrities as Steven Spielberg, Zsa Zsa Gabor and Kevin Bacon. Madoff ultimately received a 150-year federal prison sentence.

While this is educational information and not legal advice, it can help you understand Ponzi schemes and what to expect.


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