Definition: Ponzi schemes are another name for a pyramid scheme, which is now illegal. These schemes can be investments, like the Madoff Ponzi scheme, or fraudulent multi-level marketing businesses. The hallmark of a Ponzi scheme is that the people who start them make money, not by a legitimate investment or business, but by getting new people to pay fees to join the scheme. The scheme looks legitimate, but usually promises much higher-than-average returns. Often, the early participants will get these returns, but it comes from the fees paid by the later entrants. Eventually, these schemes fall apart because it isn't possible to keep recruiting enough new people to keep it going.
Ponzi schemes are named for Charles Ponzi, who lured thousands of investors in New England in the 1920's. He promised 40% returns in 90 days for investing in a business which bought and sold international postage stamps. He received $1 million during one three-hour period. He paid off a few early investors, to make his scheme look legitimate, but really he had only bought $30 worth of the international mail coupons. (Source: SEC, Ponzi Scheme, Pyramid Scheme)
Also Known As: pyramid scheme
Examples:
Bernard Madoff ran a fraudulent investment fund that could cost investors as much as $50 billion. The money from new investors paid the returns for existing customers, a fraud known as a "Ponzi" scheme.
