Jargon Junction: Ponzi Scheme
A scam as old as time
Named after legendary Masshole Charles Ponzi, a Ponzi scheme is a classic financial innovation which utilizes fraud and deception to hoodwink unsuspecting investors and generate financial ruin.
These scams have been around for centuries and remain distressingly popular because they’re disturbingly easy to execute.
Here’s how they work:
An ambitious, silver-tongued fraudster raises money from an initial group of suckers, then purports to pay this initial group of suckers an impressive return with money raised from a new group of suckers. For instance, imagine the first group invests $100,000 and the second group invests $250,000. The organizer of the scheme could then pay the first group $150,000 and claim they reaped a +50.0% nominal return.
This deception creates the perception the investment is a winner, which entices even more new suckers to join the fray. Perhaps a third group invests $500,000, for example. As long as the cycle continues, and the payouts are infrequent, the Ponzi schemer will produce enough liquidity (e.g., cash on hand) to propagate the myth and rope in more rubes.
In theory, this process could repeat until all possible dopes were duped, though one of two outcomes will inevitably kill the vibe. Less commonly, the perpetrator will steal the money, abscond to a country with no extradition clause, and disappear forever. More commonly, too many investors will ask for their money back at the same time, and when the Ponzi organizer can’t pay up, the scheme will collapse. In both scenarios the victims will quickly realize they’re cooked.
Peddlers of Ponzi schemes tend to be sketchy, pushy finance-types who promise impossible returns with impossible consistency, refuse to register their investments, employ “complex” and “sophisticated” strategies too hot for vanilla, run-of-the-mill investment funds, always balk when you ask for your money back, and are too busy making moves in the market, Bro, to bother with administrative hassles like “accounting” and “documentation.”
While these warning signs might appear obvious, rarely can our sad little monkey brains resist a good get-rich-quick scheme. As always, stay frosty out there.
