Scrutinizing the Scam: The Ponzi Scheme

The ponzi scheme has become synonymous for being conned or getting scammed in the financial markets. It’s name derives from one of the greatest frauds of all time: Charles Ponzi.

Charles Ponzi was a prominent businessman in Italy who thought of one of the greatest scams in the world that earned him the reputation as one of the top con artists in history. He started his hoax back in 1920, promising people that if they invest in his financial instrument which happen to be international postal coupons, they will receive the deal of a lifetime: 50% return within 45 days and 100% return within 90 days. Of course, investors were quick to jump into the bandwagon because it’s 1920 and people were way more trusting back then. Plus, they haven’t heard of the ponzi scheme yet because, well, they were the first ever victims of the scam. $15 million in investments and one year later, Ponzi was finally caught. He was only able to give back $5 million dollars and served a mere 5 years in prison. But wait, there;s more. After going in and out of prison for other crimes, Ponzi was not done yet. His next big  act involved selling fraudulent real estate. He was, fortunately, caught again. Charles Ponzi spent the rest of his life penniless while his name was forever stuck as the synonym for scamming.

The way it works is that the criminal or the con artists draw people to invest in whatever empty promises they make. Upon investment, the first investors are paid for when later investors come in. In short there is no actual profit generation. The investors just pay each other with the earlier investors receiving the money from the later investors. This scam usually end when the authorities find out about the scam or when there are no more investors and the whole system collapses. By then, most ponzi schemers have already disappeared.

Ponzi schemes are still going on today. They take on modern forms of course and they have evolved to become more believable and more promising. Some of the most famous ones throughout the years include music producer Lou Pearlman, pastor Gerald Payne, and probably the most famous of all, Bernie Madoff who took $65 billion from investors and is now serving the maximum 150 years in prison. Today, security measures have been placed and authorities are always on the lookout for suspicious activity. However, the ultimate defense against a ponzi scheme is in the investor himself. Professional skepticism is the an attitude that is encouraged to be adopted by market participants. This concept dictates that people must always be alert at all times, have a curious mind, and the passion to research what their investing on without bias.

Don’t be fooled by empty promises. Do your research and be vigilant. Always remember, if it’s too good to be true, then it probably is.