Recognize and report Ponzi schemes

What is a Ponzi scheme?

A Ponzi scheme is an investment fraud that pays existing investors with money collected from new investors, while telling everyone the payments come from profits. There may be no real investment at all, or a small real business used as cover. Because nothing is actually producing the promised returns, the scheme needs a constant flow of new money. It collapses when new money slows down or too many people ask for their money back at once.

The name comes from Charles Ponzi, who ran one of the most famous early versions in Boston in 1920. Read how his scheme worked, along with four larger ones that followed.

Common warning signs

• High returns described as guaranteed or "low risk"
• Returns that stay smooth through market downturns
• Seller or product not registered with the SEC or a state
• A strategy described as too secret or complex to explain
• Paperwork errors, or statements only from the promoter
• Pressure to roll over gains instead of cashing out
• Delays, fees, or excuses when you try to withdraw
• Rewards for bringing in friends, family, or members of your group

Any one of these deserves questions, not panic. Legitimate investments sometimes have one; Ponzi schemes usually have several. See annotated examples of each tactic.