Ponzi scheme
A Ponzi scheme is a technique to defraud trusting investors, named after Charles Ponzi, an early perpetrator.[1]
In the scheme the fraudster tells his trusting investors he or she has invested in a lucrative but legitimate investment, on their behalf.[1] The fraudster makes payments to his first investors, telling them it is the interest or dividends from the legitimate investment. However, the payments merely come from the investment made by new clients. The scheme relies on his first investors telling their friends they too should invest in the scheme.
An article in the New York Times called ponzi schemes "A Scheme With No Off Button," as it requires a constant increase in the number of new investors.[1] This means there is no good way for the fraudster get away with the crime. A downturn in the economy, or the exhaustion of the pool of potential investors, will always mean a day will come when he or she does not have new money coming in to pay out the dividends.
References
- ↑ 1.0 1.1 1.2 Catherine Rampell. A Scheme With No Off Button, New York Times, 2008-12-21. Retrieved on 2024-02-06. “Mathematically speaking, Ponzi schemes are doomed. They work by bringing in new investors to pay off old ones. In pure form, there’s never any actual business activity; the money just rolls backward from ever-increasing numbers of investors to keep up the appearance of profits. This means the scheme requires an infinite supply of new suckers.”