Categories Money and Power

What Is A Ponzi Scheme? This Is How It Will Break You

A group of people got caught up in a fake investment scheme and when the group started raising up issues that got me curious, I decided I would follow it up by performing a thorough investigation and research on what the culprits had probably failed to achieve. Infact these investment groups become so popular that it beats you why then have they closed? Did someone break their bank or their website? Absolutely nothing of the sort happens to everyone’s shock. The word Ponzi is used regularly to describe the scheme/plot/model of business such scammers usually employ on their unsuspecting victims. Just knowing what it means may even break you. It is an illegal business model that goes way back from the 1880s.

Ponzi Scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. It was named after Italian businessman Charles Ponzi, the father of all ponzi schemes. It leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds.

A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.

This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.

Both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up and there isn’t enough money to go around. At that point, the schemes unravel.

The most famous modern Ponzi scheme was orchestrated by Bernie Madoff.
Madoff promoted his Ponzi scheme as an investment strategy called the split-strike conversion that utilized ownership of S&P 100 stocks and options. Madoff would use blue-chip stocks which have highly accessible historical trading data which he could back into to falsify his records. Then, falsified transactions that never occurred were reported to yield the desired periodic return.During the 2008 Global Financial Crisis, investors began to withdraw funds from Madoff’s firm, exposing the illiquid nature of the firm’s true financial picture. Madoff stated that his firm had approximately $50 billion of liabilities owed to approximately 4,800 clients. Sentenced to 150 years in prison with forfeiture of assets of $170 billion, Madoff died in prison on April 14, 2021.

Common Traits of a Ponzi scheme:

  • There is a guaranteed promise of high returns with little risk
  • A consistent flow of returns regardless of market conditions.
  • Investments that have not been registered with the Securities and Exchange Commission (SEC)
  • Investment strategies that are secret or described as too complex to explain
  • Clients are not allowed to view official paperwork for their investment
  • Clients face difficulties removing their money.

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