What Is A Ponzi Scheme?
By Dan Blom
(CBS) -- What Is A Ponzi Scheme?
It all started with Charles Ponzi: a two-bit hustler, confidence man who worked the streets of Boston after World War I. He hit the big time and eventually became synonymous with the scam when he started buying foreign postage coupons at a reduced rate overseas and cashing them in here in America.
He got investors to buy into his postage scheme by telling them he could double their investment. People were so taken in that Ponzi collected a million dollars a week during the height of his enterprise. The postage exchange scam was a quirk of the times and won't work today, so don't even try.
But, Ponzi had stopped purchasing the foreign postage coupons and was really paying off the old investors with the money that came in from the new investors. And thus, the scheme was born. A local newspaper figured out what Ponzi was up to and published stories condemning the scam.
Ponzi was arrested, pleaded guilty and was sentenced to five-years in federal prison and later served additional time in various state prisons. In all, investors lost $20 million, well over $250 million to today's dollars. However, published reports of the time reveal that some investors never believed that they had actually been bamboozled, proven by the fact that they continued to send Ponzi Christmas cards in jail.
Even though Ponzi was the first the make his scheme notorious, he certainly was not the last. It's a scheme that still proves to be effective today. Most notably was the recent work of Bernie Madoff. The New York financial advisor was charged with bilking more than $60 billion from investors. His reign as the new King of Ponzi came to an end when he was convicted of fraud in 2009. Madoff is serving a 150-year prison sentence.
The U.S. Securities and Exchange Commission is the federal agency that usually goes after Ponzi schemes and shuts them down. In 2018 the SEC issued an alert warning seniors that they are especially vulnerable to Ponzi schemes because scammers target people with pools of money, like retirement funds.
The SEC advises potential investors to always make sure the business you are dealing with is licensed and that the investment is registered with the SEC. As well, potential investors should always weigh the risks against the potential rewards. And, if you don't completely understand how the investment works you should probably take a pass. A major red flag that you might be dealing with a Ponzi scheme? Often-times promised dividends or payments are delayed or canceled without proper explanation.
Dan Blom is an investigative producer for CBS 2 Chicago.