Ponzi Scheme

In: Business and Management

Submitted By idilia123
Words 1504
Pages 7
ESSAY CASE: ‘Ponzi schemes’
‘Ponzi schemes’ are scams in which investors are promised exaggerated profits (often short-term) from supposedly can’t-miss investments. If and when early investors are paid returns, the money doesn’t come from actual investment gains; it comes from new cash pouring in from later investors.
Initially the promoter will pay out high returns to attract more investors, and to lure current investors into putting in additional money. Other investors begin to participate, leading to a cascade effect. The "return" to the initial investors is paid out of the investments of new entrants, and not out of profits.
Often the high returns lead investors to leave their money in the scheme, leading the promoter not to have to pay out very much to investors; they simply have to send statements to investors showing them how much they earned. This maintains the deception that the scheme is a fund with high returns. Ponzi scammers promise windfall returns, counting on their victims to be either gullible or greedy—and sometimes both. The appeal of quick and hefty profits is precisely why some people fall for Ponzi schemes, even though they clearly fall into the category of too good to be true.
Charles Ponzi, an Italian immigrant living in Boston in the early 20th century, was a master at playing the gullibility-greed game. He was clever, yes, but more than that, he was charming and charismatic, easily convincing people to jump aboard his pie-in-the-sky schemes. He claimed to be taking advantage of foreign currency rates to make millions of dollars by manipulating postal reply coupons. (The coupons could be purchased abroad in foreign currency and included in correspondence; recipients of those letters could then redeem the coupons at U.S. Post Offices for enough postage to reply to the original correspondent.)
With great fanfare, Ponzi opened his postal…...

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