Thanks to supervillain Bernie Madoff, we all now have a passing acquaintance with the term "Ponzi scheme." But what is it exactly?
Broadly-speaking, a Ponzi scheme is any investment scam that promises high rates of return for little or no risk. In plain-language, it's the classic "too good to be true" and proverbial "robbing Peter to pay Paul" scenario, and, well, you'd think we'd have learned our lesson by now since it's officially been around for about 100 years.
Origins of the Ponzi Scheme
Commonly thought to have been invented around the turn of the 20th Century by an Italian immigrant named Charles Ponzi (he had multiple aliases), the scheme itself seems to be just another thing Ponzi stole - there are indications the original concept actually belonged to a crooked Brooklyn bookkeeper named William F. Miller.
At any rate, Ponzi's own Ponzi scheme involved paying early investors in his massive postal coupon reply operation with the investments of later investors. Everything worked swell to the tune of $250,000 a day in profits (in 1920 dollars!) until the famous Clarence Barron of Barron's financial paper did some poking around and... In short order, Ponzi's own company, six separate banks, and worst of all thousands upon thousands of investors went completely bust. All told, Ponzi's investors lost about $20 million dollars in 1920 dollars (about $250 now). Sounds catastrophic, right? Well, it's almost small change when you compare it to the incredible hurt Madoff put on his investors in 2008: he cost them approximately $18 billion dollars!
A few years later, and Ponzi schemes are still making headlines here and here. There have even been some new innovations to watch out for. In a recent news release, the Financial Industry Regulatory Authority (FINRA) warned that social media hubs like Facebook, Twitter, and YouTube are now being used to lure unwitting investors into current Ponzi schemes:
Ponzi Schemes Defy Common Sense with Extraordinary Promises
Apparently, as long as there are crooks there will be Ponzi schemes. The worst part about them, however, is that the most powerful weapon against them would seem to be old-fashioned common-sense. In his day, Ponzi was promising an astounding 50% return after only 45 days. The HYIP's mentioned above promised 40% per day at one time. These numbers are just what they seem: ridiculous and false. And yet since Ponzi's time and, we're sure, long before that, ordinary people were drawn in by the hype, by the early rounds of investors who actually got those 40%-50% returns, by the prospect of big returns without risk.
Can You Recover Losses Suffered Due to a Ponzi Scheme?
In terms of litigation, we have found it can be difficult to recover against the individual financial adviser who perpetrated or initiated an investor into the Ponzi scheme in the first place. However, advisers are oftentimes employed by a larger broker-dealer or firm who, if they had been properly supervising the adviser throughout these transactions, may have been able to spot the scam and protect investors.
For more detailed information on Ponzi schemes, please visit the SEC page dedicated to the issue here.
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