A Comparison of Ponzi Schemes

Posted by Jiaqi Duan.

The “Ponzi scheme” originated from a man named Charles Ponzi (1882-1949). The investment plan is simple to say, investing in something and then getting a high return. However, Ponzi deliberately made this plan very complicated, so that ordinary people could not figure out.

In 1919, when the First World War was just over and the world economic system was in chaos, Ponzi used this confusion. He claimed that by purchasing some sort of postal bill in Europe and selling it to the United States, he could make money.

Since Ponzi, in less than 100 years, various “Ponzi schemes” have emerged around the world. With the process of China’s reform and opening up, the “Ponzi scheme” has also entered China in large numbers. In the 1980s, there was a “rat meeting” in the southern part of China, which was a replica of the “Ponzi scheme”. The more well-known “Ponzi scheme” improved version is a variety of pyramid schemes.

All scams have a common character. As we all know, the risk is proportional to the return is the investment of iron law, “Ponzi scheme” often does the opposite. Liars often attract investors, who do not know the truth of a high rate of return, and never emphasize the risk factors of investment. The return rates of various cases may vary, some are too high, such as Ponzi’s promised investment can get 50% return within 45 days, and some are stable and extraordinary returns, such as Madoff’s annual guaranteed return to customers. His was only about 10%, but he strongly stressed that “investment must be earned, there is no loss.” But in any case, scammers always try to design an investment path that is much higher than the average return of the market, and never reveal or emphasize the risk factors of investment.

There is also the use of funds to make up the replenishment characteristics. Since the promised return on investment cannot be achieved at all, the return on investment for the old customers can only be achieved by the participation of new customers or other financing arrangements. This puts a very high demand on the flow of funds for the Ponzi scheme. Therefore, the scammers always try to expand the scope of the client, broaden the scale of the funds absorbed, and get enough space for the funds to replenish. Most scammers never refuse to add new funds, because the scope is bigger, not only the benefits are more substantial, but the risk of capital chain breaks is greatly reduced, and the duration of scams can be greatly extended.

And there is also the pyramidal features of the investor structure. In order to pay the high return of investors first, the “Ponzi scheme” must continue to develop offline, attracting more and more investors through seduction, persuasion, affection, and connections, thus forming a “pyramid” style. Investor structure. A small number of insiders at the apex benefit from extracting a large number of participants from the bottom of the tower and the tower. Even the inscrutable Nasdaq’s former chairman of the board, Madoff, is inevitably entangled in the layman’s clichés, making extensive use of friends, family and business partners to develop “downline”, and some people get commissions for successful “investment”. The downline has developed a new “downline”, and the snowball type has grown into a “pyramid” structure.

Jiaqi is a student at the Stillman School of Business, Seton Hall University.

Work cited:
Dunn, Donald. The Incredible True Story of the King of Financial Cons, Ponzi, 2004.