Ponzi Scheme

By: Alan Kan

The Original Ponzi Scheme:
 Named after Charles Ponzi,
“businessman” from 1920s.
 Centered scheme around International
Postal Reply Coupons (IPRC).
 Bought IPRCs abroad, because they
were cheaper outside America.
 Told investors if they invested in IPRCs,
they would in return get 50% back in 90
days.
 According to the SEC, Ponzi raised over
a million dollars in three hours.
 By the time of his arrest in 1921, Ponzi
made a total of $15,000,000.
 Not an “investment scheme”, because
it’s not a real investment.
Definition of Ponzi Scheme
 A fraudulent investment that is designed to yield high rates of
returns (interest) for little risk. Not really an investment.
 Designed to take advantage of individuals with little/no financial
investment knowledge.
 Objective is to keep a continuous flow of investors “investing”,
while pocketing cash for yourself, for as long as possible before
one of three things happen:
– A.) Investors wise up and leave, taking the remaining investment
money.
– B.) The scheme collapses under its own weight, as investments
slow due to external factors (i.e. an economic recession)
– C.) The scheme is exposed because the promoter fails to validate
their claims when asked to do so by legal authorities
Characteristics of Ponzi Scheme

 Promise big returns from investments.

 Usually uses colorful language (i.e. high-yield
investment program, extraordinary offshore
investment)
 Purposes of which is to entice gullible participants
with little or no knowledge of financial investment
jargon.
 There is only usually an appearance of financial
returns (i.e. through statements and not actual
profits)
Example of Ponzi Scheme

 I gets 5 people to invest $100 each in an “extraordinary investment”,

promising a 20% increased return in 30 days, which they agree to.
15 days later, I go to another 5 people and promise the same thing,
which they also agree to.
 At month end, I issue a statement to individual investors indicating
they each gained $120 on the investment.
 Investors see that they are making money, and put in more to
continue the investment. At the same time, word spreads and more
people sign on as investors and give me more money.
 If someone from the first group decides to cash out on the
investment and collect their money, I simply take money from the
second group and give it to the outgoing investor.
 Eventually, the scheme would collapse due to reasons outlined, and
if lucky I’ve taken all the money and disappeared.
Bernard Madoff Scandal:

 $50 billion, biggest in history.

 Instead of promising high returns, Madoff promised modest
returns (i.e. 7%).
 Limited to an exclusive clientele (i.e. Madoff limited himself to
exclusive, high class Jewish clients)
 Affected by the 2008 global financial crisis, which prompted a
larger than usual number of investors to cash out.
 Led to at least one suicide (René-Thierry Magon de la
Villehuchet, founder of Access International Advisors)
 Consequence of lack of significant regulation and oversight.