What is a Ponzi scam? Why is it called Ponzi?
The term “Ponzi” is derived from Charles Ponzi (pic on right), an Italian immigrant, who ran his original scams in Montreal before moving to Boston, where he initially worked as a clerk.
In 1919, he began a pyramid scheme by setting himself up in an office on the second floor of a downtown bank building. Ironically, he called his company the “Securities and Exchange Company,” and mailed prospectuses in December 1919, offering a 50% return on investments after 45 days, 100% after 90 days. By the end of June 1920, he was supposedly receiving $500,000 a day and paying out $200,000 a day.
Thousands of people would circle around the block and climb the stairs to “invest.” So much cash flowed into the walkup office that he had to employ 16 clerks to sort and count the money, which was stacked in closets and stuffed into waste paper baskets.
Like most pyramid schemes, Ponzi’s program eventually came to a time when the incoming cash is less than the money needed to pay older investors. When the cash inflow was interrupted, the pyramid collapsed. He was brought down by investigative journalism reports and government intervention. By the time the District Attorney closed in on July 26, 1920, more than 30,000 people had paid Ponzi $9,582,591.
Ponzi was arrested, and many of those who lost money blamed the government for their losses for having intervened. Ponzi served time in Federal prison, and then jumped bail after being convicted and sentenced to a 7-9 year term in Massachussets. state prison. He turned up running schemes in Georgia, Texas and Florida, and was finally captured and returned to Massachussets where he served his 7-yr. sentence.
Ponzi was deported to Italy, and was given a job in the Brazilian (Rio) office of the country’s new airline by Mussolini. He died in a charity ward of a Rio hospital, partially blind and paralyzed, but had just enough money to avoid being buried in a potter’s field.
Today, similar illegal pyramid or “Ponzi” schemes are operated in every type of medium. Most HYIPs on the internet are really “Ponzis” that depend on the most recent investments to pay off older obligations. Many of them are doomed because the commission structures are so financially onerous that the only way to meet ongoing commission payments is to suck in more participants to keep the cash flow moving. Once the outgoing cash (payment obligations) exceeds the incoming cash (new spends), the program collapses and the members are scammed.
– With excerpts from InsiderReports.com
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