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What is a Ponzi Scheme?


Investments can be challenging to manage for first-time investors looking to grow their funds for the future. Whether you want an early retirement or feel that investing in an index fund is excellent financially, it is always good to seek options to grow your savings.

When it comes to investments, groups are always looking to take advantage of those far less experienced in the market and capitalize on this naivety by committing fraud. One of the most infamous types of investment fraud is the Ponzi scheme, and we’re here to break down what a Ponzi scheme entails!

The Origin Of Ponzi Schemes

Ponzi schemes have been around for some time and date back to the early 1920s with the creator of the investment fraud strategy known as Charles Ponzi. Charles’ plan involved exploiting exchange rates with international postage reply coupons. Charles could purchase a postal reply coupon overseas for a much lower rate due to currency differences and redeem these coupons in the United States to receive postage stamps at a heavily discounted rate.

What made Charles’ scheme infamous was that the small exploit ballooned into a massive fraud system that boasted a network of individuals shipping postage replies to the United States, and he claimed to his acquaintances that he could get them huge orders of reply coupons in bulk for cheap. The reality was that Charles was nowhere near capable of generating the stamps he claimed and eventually was caught defrauding numerous investors.

How A Ponzi Scheme Begins

While stamps seem quaint, the process in which Ponzi schemes operate is quite nefarious and still takes advantage of people today. So the way a Ponzi scheme works is that the con artist has a pool of initial investors with a promise of turning their initial investment into a massive profit.

These promises can range from doubling your money in mere months or even weeks whatever it takes to get the initial investment. Once the initial group of investors gives money to the Ponzi schemer, the schemer then pockets the money and provides alleged updates on the investment by providing fraudulent reports that showcase a return on investment.

How Ponzi Schemes Grow

Now that the schemer has their initial group of investors, they need some incentive to stay in the Ponzi scheme for the scammer to keep getting money. Next, the scammer searches for a new group of investors with the same pitch. When the new investors pay the scammer, part of that money is taken by the scammer, while the rest is given back to the initial investors, proving that their investment is growing.

While initial investors believe that their investment strategy is paying off, they are just being fed money from other investors believing the same lie. Eventually, the scammer needs to keep finding more investors to grow the network of available funds to sustain the Ponzi scheme. Ponzi schemes are not sustainable and eventually collapse due to investors leaving and the pool of funds drying up.

Whenever an investor wants to leave the Ponzi scheme, typically, the schemer will conjure a story about what this person will lose out on, but if that fails, the schemer takes some money from their account to pay off the individual. We can see Ponzi schemes today, in August of 2021, a man in Georgia had defrauded hundreds of millions of dollars from investors. The Ponzi scheme was orchestrated by John J. Woods, who would promise investors around a 6% return on investment over three years through his fund. The fund was tied with real estate, and then lo and behold, any returns seen were funds from different investors.

Spotting A Ponzi Scheme

While red flags are pretty apparent with any investment opportunity, sometimes Ponzi schemes can seem reasonable for those unfamiliar with investments. Groups asking for an upfront investment, while not always the sign of a scam, should be proceeded with caution. Likewise, any investment opportunity promising returns higher than ten percent in under a year is questionable. Be extra cautious with investment opportunities without stated downsides or a guarantee without adequate proof. If it sounds too good to be true, you have to wonder why everyone isn’t everyone taking advantage of this opportunity.

If you or someone you know has been the victim of a Ponzi scheme, at Nick Lotito & Seth Kirschenbaum our attorneys are here to help you. Call (404) 471-3177 today for a consultation.

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