Ponzi Scheme

Named after fraudster Charles Ponzi who ran a hugely successful pyramid scheme in the U.S. at the turn of the twentieth century, a Ponzi Scheme is an elaborate investment operation that pays investors directly from the money received from subsequent investors. Presented as a "guaranteed" investment opportunity, most Ponzi Scheme operators make no attempt to actually invest the money entrusted to them - instead, they pay the promised returns to the early investors entirely out of the funds received as more investors join.

Much of the success of a Ponzi Scheme - at least initially - lies in the fact that the early investors do actually receive dividends and it is easy to convince others to join based on this success. In some cases the early investors are in on the scam but this is not necessarily the case. However, like any pyramid scheme, it can only survive as long as enough new investors can be brought in to maintain payments to earlier investors, and when it is impossible to do so, the collapse of the scheme is sudden. Often times, the operator will abscond with the majority of the funds or else investors that fail to receive the dividends they have been told are coming, will contact authorities.