Ponzi Schemes

What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent business operation that promises investors high returns on an investment with little or no risk. These schemes often offer returns at higher-than-market rates to entice individuals to invest. Investors are led to believe their money will be invested in a legitimate business venture and generate cash returns. In reality, their investments are used to pay earlier investors, creating the illusion of profitability and a continuous cycle.

Because this type of scheme is dependent upon the ability to attract new investors, a Ponzi scheme will eventually collapse when the flow of new money stops. Without continued capital, the perpetrator can no longer provide the promised returns which will expose the scheme’s fraudulent nature.

History of Ponzi Schemes

The first Ponzi scheme was orchestrated by Italian immigrant Charles Ponzi in 1919. Ponzi convinced investors that he could generate returns exceeding 50% in a short period through trading international postage. The promise of high returns lured investors who collectively entrusted him with approximately $15 million.

Ponzi used new money to pay early investors, creating the illusion of a successful investment. As his popularity grew with investors, so did scrutiny of his business operations. As investors began demanding their money back, the lack of real profits became evident and the scheme was uncovered.

How Ponzi Schemes Work

A key aspect of a Ponzi scheme is the promise of high returns with minimal risk. Perpetrators rely on this to attract new investors, often using complex or technical explanations to add validity to the scheme. These perpetrators lure investors with unheard of profits, but many individuals question the high rates of return, so they must have a believable story.

Once investors have been drawn into the scheme, perpetrators must maintain their trust and conceal the truth for as long as possible. This typically involves the promise of regular payments, which must be made in a timely manner to corroborate the initial story. The receipt of promised returns keeps investors content and keeps them from questioning the operation.

Modern Examples and Evolving Tactics

There are countless examples of Ponzi schemes occurring each year, but perhaps the most notorious one involved prominent businessman Bernie Madoff. Madoff was able to convince individuals, charitable organizations, and companies to invest in his “absolute return” strategy.  An important element in his scheme was his reputation and exclusivity, which made the opportunity seem like a privilege. When the 2008 financial crisis hit, Madoff could no longer meet repayment requests, revealing the decades-long fraud that lost investors approximately $20 billion.

Ponzi schemes continue to evolve with changing technology. The introduction of virtual currencies, such as Bitcoin, and digital assets, have introduced new opportunities for perpetrators. Virtual currencies are attractive to perpetrators due to their privacy features and limited oversight compared to conventional currencies. Even though cryptocurrency is still relatively new, there have already been numerous Ponzi schemes and other frauds involving it. In June 2025, the U.S. Attorney’s Office filed a civil forfeiture complaint involving more than $225 million in cryptocurrency related to investment fraud schemes.

Current Trends and Consumer Impact

During the “Madoff era”, the average size Ponzi scheme involved approximately $98 million; however, the amount lost via investment scams has increased significantly. According to the Federal Trade Commission (FTC), consumers reported losing over $12.5 billion to fraud in 2024, with investment scams making up approximately $5.7 billion—up 25% from the previous year.

If an investment opportunity sounds too good to be true, it’s important to proceed with caution. Verify the legitimacy of the investment, request documentation, and seek professional advice before committing funds. If you think you may be a victim of a Ponzi scheme, you should contact law enforcement, an attorney, and a forensic accountant.