What is a Ponzi Schemes: History and Examples

Ponzo schemes continue to grow in complexity and notoriety. These schemes are not transactions or one-time hacks. “Ponzi schemes are fraudulent business operations that promise high returns with little or no risk, claiming investors' money will go towards a legitimate investment.” Investors believe they will score huge returns from their initial investment, yet most only realize once it is too late that the entire scheme is doomed to fail from the beginning.

Individuals will experience a number of fallouts from being a victim of a Ponzi scheme. Monitoring their personal credentials with IDStrong is one way to determine if your  social security number, email, or other personal entities have been compromised.

What is a Ponzi Scheme?

A Ponzi scheme is a type of  investment fraud. Its focus is on initially marketing themselves as savvy investors with connections across all business and political arenas. The Ponzi leader is often a celebrity. Using their various connections, the Ponzi group lures investors with promises of huge returns with no risk to their initial capital investment. More to the point, most Ponzi schemes have little or no actual returns.

How Does a Ponzi Scheme Work?

The scheme relies on a continuous inflow of new capital to pay fake dividends to earlier investors. As more investment flows in, more are paid to the first-in investment pool.

Ultimately, this scheme only works if there is a steady flow of new investment capital. With the additional investor funding, the Ponzo group will keep the ability to pay their false dividends.

Many of these private investments turned out to be Ponzi schemes.

"Movie star Kevin Bacon revealed in a podcast that his family lost ‘most’ of their money in the Bernie Madoff Ponzi scheme."

"Johnny Damon and Nady are among the investors whose assets were frozen this week after the feds raided Stanford’s Houston offices and the Securities and Exchange Commission accused Stanford of fraud involving the sale of $8 billion in certificates of deposits that boasted unusually high returns."

Notable Examples of Ponzi Schemes.

The enticement of private investment offerings has a long history of appealing to high-net-worth individuals, including sports and movie stars. Here are some examples of Ponzo schemes that cost their investors millions and, sometimes, billions of dollars.

Charles Ponzi.

In 1920, the original Ponzi, Charles Ponzi, notoriously lured several wealthy Boston families into investing. Charles scammed close to $15 million from these investors. Charles's scheme became known as the "Rob Peter to Pay Paul."

The Bernie Madoff Ponzi Scheme.

The Bernie Madoff scheme followed similar characteristics to the original Charles Ponzi scam. However, Madoff took the Ponzi scheme to a whole new level. His scheme ran for decades, costing his investors billions. Madoff created elaborate financial statements and updates on his investment portfolio to help continue to lure more investors. Like Charles's scheme, Madoff paid dividends to his investors from fresh investor capital. Madoff's scheme eventually collapsed in 2008. During the market and real estate downturn, many high net-worth investments needed cash to cover their other losses, so they turned to Madoff to liquidate their holdings. Madoff couldn't cover these liquidations and eventually was arrested for fraud.

The George Santos Ponzi Scheme.

Congressional representative, George Santos Ponzi’s scheme targets people who recently came into some money either through inheritance or court settlements. Santos worked with a Florida-based Harbor City Capital. His position focuses on luring new investors to place their funds into Harbor City Capital for close to 16% annual returns. Harbor City raised close to 17 million from 100 investors.

George Santos claimed he was unaware of any fraudulent activity with the firm he worked for. However, he was accused of stealing the identities of his investors. He used funds stolen from his investors to help fund this campaign for office.

The OneCoin Cryptocurrency Ponzi Scheme.

Created by a Bulgarian national, Ruja Ignatova, OneCoin is one of the largest fraudulent Ponzi schemes in recent years. Ruja marketed OneCoin as a cryptocurrency without Blockchain technology, distributed ledgers, or accurate investment reporting. The entire Ponzi scheme functioned under one decentralized ledger. The scheme collected close to 3.5 billion dollars worldwide. Ruja grew her investment pool by rewarding current investors and introducing others.

Origins of the Ponzi Scheme.

Charles Ponzo sold promissory notes with a guarantee of 50% returns within 90 days. His scheme focused on buying international reply coupons (IRC) in one currency and then selling them in another country for a better currency rate. The difference between one currency and the other was his profit. He created a securities trading company based on this idea to convince investors of its incredible potential.

After several articles in the local press, investors became concerned about their money and began holding off, causing a downward rippling effect.

What Are Some Common Red Flags of Ponzi Schemes?

Spotting a Ponzi-type scheme business model is very challenging for most investors. Every investor seeks several things:

• Avoid paying capital tax on their profits.
• Keep the funds offshore and away from the IRS
• Double-digit returns with little or no risk.
• Victims become exposed to the Ponzi leader who relishes their investments as the "deal of the century."
• Many investors become starstruck by seeing several public figures invest in these exclusive opportunities.

Here are facts to remember with every investment to avoid becoming a victim.

• Every investment has risk and tax implications, and engaging in tax fraud to avoid paying taxes is illegal and can have serious consequences.
• No investment outside of certificates of deposit and Treasury notes has an expected rate of return.
• Most investments, including ones in emerging markets, rarely produce a positive cash flow.
• Most private firms receiving investment capital have a successful Initial Public Offering (IPO).
• Any promise of a guaranteed successful IPO is most likely a Ponzi scheme.

Ponzi Scheme vs. Pyramid Scheme: The Main Differences.

Ponzi schemes are based on maintaining their perception of a reasonable investment by taking money to pay their early investors. Without the constant influx of fresh capital, the Ponzi scheme collapses.

A pyramid scheme is different. It rewards its members for recruiting new investors. The existing investors get paid through membership fees for every person they recruit. “People at the top of the pyramid scheme earn the most money.”

Pyramid scheme leaders use shame and guilt to entice the people on the lower end to push to get more people to purchase memberships. People at the lower level must share their recruiting membership awards with the higher earners.

Pyramid and Ponzi schemes are similar. Both promise high returns with minimal risk. The perpetrators falsify their records, report fake profits, to help lure new victims. One critical difference between the two Ponzi schemes is the challenge of proving they are fraud.

Reputable corporations like Amway, Mary Kay, and Tupperware have been accused of pyramid schemes. However, like many corporations, these present a public face of legitimacy and often retain powerful lawyers. Individuals or small groups usually execute Ponzi schemes, hence these schemes are less legally protected than most pyramid corporations.

What Is the Most Famous Ponzi Scheme?

Many Ponzi schemes have cost investors billions over the last 70 years. The most famous Ponzi scheme was the Bernie Madoff case. Madoff's Ponzi lasted for several years, costing his investors billions of dollars with little hope of recovering their investment. Investigators believe the Madoff scheme may have started back in the 1960s. Madoff conned his investors about 20 billion over the life of the Ponzi scheme.

“He was arrested in 2008 and sentenced to 150 years in prison.” Madoff later died at 82 while still in prison.

Several legal and debt recovery firms, including  Kroll, helped victims of the Madoff Ponzi scheme recover close to 14 billion.

In conclusion ponzi and pyramid schemes will continue to exist because investors continue to fall for them. With the promise of high returns tax-free and stored in an off-shore bank account and not accessible by the American government.

• Investors who are approached by Ponzi and pyramid operations should take the time to research all the claims being presented to them. Identity theft is another challenge arising from Ponzi and Pyramid operations.
• Ponzi and pyramid schemes require investors to disclose their address, social security number, bank account information, and driver's license number. With this valuable information, Ponzi operators like George Santos can now apply for bank loans, credit cards, and other debt under the investor's name.

Individuals should subscribe to ID monitoring and scanning services from firms like IDStrong. IDStrong's easy-to-use, secured website empowers users to check various personal credentials, including their social security number, email address, phone number, and other entities, to see if their identity has been compromised.

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