Ponzi schemes are a type of securities fraud that can cost investors millions, sometimes billions, of dollars. Over the years, Ponzi schemes have operated around the world. Some of history’s most damaging Ponzi schemes have taken place in the past decade, with others surely still to be discovered. Charles Ponzi and Bernie Madoff defrauded investors in two of the best known Ponzi schemes of all time.
Ponzi schemes are named for Charles Ponzi, an Italian immigrant who lived in the United States in the 1920s. Ponzi discovered a way in which he could take advantage of international mail coupon to make a large profit. Seeing an opportunity, he set his plan in motion and began soliciting investors.
Almost immediately, Ponzi ran into difficulty operating his plan. Although he ceased the actual operation of the plan, he continued to recruit new investors. By mid-1920, Ponzi was earning about $250,000 per day and was paying the returns for his existing investors with funds contributed by new investors.
The scheme eventually collapsed as investors became informed that the amount of money Ponzi had allegedly invested in international mail coupons far exceeded the amount of coupons actually in circulation, and Ponzi spent four years in federal prison.
Perhaps the most famous Ponzi scheme known today was operated by Bernie Madoff. Madoff was able to operate his scheme for over 30 years by offering steady, adequate returns to investors, regardless of the direction of the market.
In 2008, as the economic downturn steepened, Madoff was unable to pay his investors as they tried to cash out of the market, and his scheme collapsed. Madoff was arrested in 2009 and is currently serving a 150 year prison sentence.
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