Guide Note

A Ponzi scheme is a kind of financial fraud in which a single person—or tight-knit conspiracy—offers high returns on an investment, but does not actually invest the bulk of the money that is solicited. Instead, the kingpin will take a portion of the money for himself, and pay early investors with money from more recent ones.¹ Ultimately, the kingpin and a minority of investors can become wealthy by lining their pockets with other investors' money.¹

Fast Facts

1. Named after Charles Ponzi
2. Usually promises high returns in the short term²
3. Differs from a pyramid scheme, which doesn't mainly benefit a central party³

Between 1919 and 1921, an Italian immigrant named Charles Ponzi administered an investment plan that would become the prototype for the Ponzi scheme. Originally, Ponzi discovered a way to legally take advantage of exchange rate differences in postage stamps, and began to solicit investors in the operation. Within months he had amassed up to 40,000 investors and ended up paying out from the investments themselves, rather than actual profits.² He was convicted on fraud in 1921, after making millions for himself.²

Andres Pimstein