A Ponzi scheme occurs when an individual or institution defrauds participants by paying earlier investors with funds provided by later investors. This perpetuates the illusion of a profitable venture and possibly high rates of return. While the history of Ponzi schemes goes back many years, this form of investment fraud is named for Charles Ponzi, one of the most famous cases.
If you or a loved one has been impacted by a Ponzi scheme, do not hesitate to contact the Silver Law Group. Our Ponzi scheme attorneys represent investors across the nation who have been lured into a Ponzi scheme and help recover their investment losses from these fraudulent persons or organizations.
The history of Ponzi schemes does not originate with Charles Ponzi, as fraudsters existed long before his time. However, he is one of the most prominent examples of how the scheme works and the damage it can perpetrate on victims. Before establishing his famous scheme, Charles Ponzi ran into trouble with the law on numerous occasions for crimes like forgery and illegal smuggling.
Then in 1919, Ponzi established a small import-export business and received a catalogue filled with International Postage Reply Coupons. Users could exchange these coupons at their local post office for stamps. In other words, the recipient could use a coupon from another country to purchase postage in the U.S., then send a reply back to the person abroad. It was also not uncommon at the time for people to redeem postage stamps for actual currency.
Ponzi noticed that the coupons he received had been purchased in Spain, where the exchange rate between the local currency and the U.S. dollar at the time was significant. At that point, Ponzi conducted what is known today is “arbitrage,” or buying and selling the same currency in different markets to benefit from the price differences. He decided to convert dollars to Spanish currency to purchase International Postage Reply Coupons, then redeem them in U.S. postage stamps that could be redeemed again for U.S. dollars.
Ponzi launched a business called The Security and Exchange Company. He sent out correspondence promising investors a 10% rate of return each month if they deposited funds into the arbitrage venture. That was roughly double the annual rate of return that banks were offering investors at the time. Ponzi started accepting money from investors in early 1920, and eventually, he was promising investors a 50% rate of return in just 90 days from his currency arbitrage venture.
He gathered an estimated $10 to $15 million from investors in just a few months. However, he did not use those funds to engage in arbitrage and benefit from the price differences in currency using International Postage Reply Coupons. While doing so would not have been illegal, it was impractical.
Instead of investing the money from depositors, he put it in a mutual savings bank that he controlled. When investors would come asking for payment of their promised returns, Ponzi would instead write checks from another bank he controlled, paying older investors with deposits from newer investors.
By the end of summer 1920, Ponzi’s scheme had unraveled after investigations by newspapers and federal authorities. He was arrested and charged with numerous federal crimes, including grand larceny and mail fraud. Many investors recovered just cents on the dollar for their deposits with Ponzi.
Many other similar schemes have occurred since then, but the one that the public is now most familiar with is Bernie Madoff. A former chairman of the Nasdaq stock exchange, his firm ran an asset management business out of the public eye, which he privately called “one big lie.” Through this Ponzi scheme, he ended up creating nearly $65 billion in losses, the largest scheme of its kind in history. Madoff was arrested by the FBI in December 2008 and plead guilty to multiple charges. He was sentenced 150 years in prison and died there in 2021.
The history of Ponzi schemes is fraught with stories of fraudsters taking advantage of investors who entrust their money to them. Ponzi schemers will often downplay risks and guarantee the success of an investment to lure their victims, but display a serious lack of transparency and use various delay tactics when investors request more concrete information.
Limited time offers, pressure tactics, inconsistent documentation, discouragement of cash outs, or unregistered entities are also hallmarks of Ponzi schemes.
While the history of Ponzi schemes has revealed some notorious actors through the years, many fraudsters get away with their illegal activities for a long time before the bottom falls out.
Scott Silver and the securities fraud attorneys at Silver Law Group have the experience, resources, and knowledge to seek recovery on your behalf. We can protect your rights and work tirelessly to recoup the losses you have sustained from Ponzi schemers – and we have the results to prove it. Do not hesitate to contact us and schedule a consultation.
