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Ponzi Scheme

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Ponzi Scheme
Corporate Finance

A Ponzi scheme is an illegal business practice in which new investor’s money is used to make payments to earlier investors. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. The returns are repaid out of new investors’ principal, but not from profits. This can continue as long as new investors line up with cash, and old investors don’t try to withdraw too much of their money at once.
Ponzi scheme is named after Charles Ponzi, known as the Father of the Ponzi scheme and the infamous swindler, who paid out returns with other investors' money. Charles Ponzi was born in 1882 in Parma, Italy. Ponzi marked what would become known as the Ponzi scheme in December 1919. An alliance of international postal services had begun selling postal reply coupons after World War I ended. Each coupon was good for one stamp in the affiliated countries. This allowed the mail services to continue operations smoothly despite the instability of most European currencies at the time. That’s when Ponzi established the Securities Exchange Company, a one-man operation that offered coupons reflecting a supposed investment in international reply coupons (IRCs). IRCs are legitimately sold in the postal facilities in many nations, intended to be enclosed with international correspondence and redeemed for return postage from the receiver's nation. At the time, IRCs were sold for a fraction of a cent less than the price of the stamps they could be redeemed for, so the plan's profitability seemed reasonable to investors. In reality, the profit margin was so slim it would take millions of IRCs to make just a few dollars, but Ponzi promised his customers a 50% profit on their investment, payable in 90...

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