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What is a Ponzi Scheme?

Ponzi Scheme:

Bernie Madoff, the Wall Street financier who was sentenced to 150 years after being convicted for what came to be known as the largest and most devastating Ponzi scheme in financial history, died in the US.

  • A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
  • The scheme leads victims to believe that profits are coming from legitimate business activity (e.g. product sales and/or successful investments), and they remain unaware that other investors are the source of funds.
  • Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.
  • The term “Ponzi Scheme” was coined after a swindler named Charles Ponzi in 1919.
  • However, the first recorded instances of this sort of investment scam can be traced back to the mid-to-late 1800s.