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How Do Ponzi Schemes Work?

By  of Shustak Reynolds & Partners, P.C. posted on Monday, July 7, 2014.

The 1920’s were roaring and just on the cusp of the communication age. The United States Postal Service was at the forefront of connectivity, especially across the pond. If you were generous and mailed a letter overseas, you might include an international reply coupon, a voucher that paid the required postage to send a response.

It was a common system, so few questioned an entrepreneurial Italian immigrant who saw it as an interesting investment opportunity. His idea? Purchase the reply coupons outside the U.S, where they were significantly cheaper, and resale them in the states at a higher cost. The idea intrigued investors who saw a clean, straight forward route to producing returns of up to 50% in as little as 45 days.

Unfortunately, the idea worked better in theory than in practice. Conducting business overseas, shipping internationally, exchange delays and additional costs kept Charles Ponzi, the originator of the idea, from paying his investors as quickly. Instead of facing the truth, Ponzi invited more investors to participate, using the “new” money to pay dividends to the original shareholders and beginning a never-ending cycle. Because investors were actually “making money,” no one was complaining and Charles Ponzi was living extravagantly on the millions he had collected in the process.

When the smoke cleared, Ponzi had purchased and sold over 160 million reply coupons. To his dismay, only 27,000 actual coupons physically existed in the world, and he was busted.

Millions were swindled.

Ponzi Schemes Today

Reply coupons are a thing of the past, but Ponzi Schemes are not. In 2008, Bernard Madoff, founder of Bernard L. Madoff Investment Securities LLC, admitted that the asset management arm of his firm was a ruse. He swindled humble investors, small companies and even charities out of a cool $65 billion over the course of 20 years. Because of his stature and influence in the finance industry, he had the trust of his investors.

How to Spot Them

Ponzi schemes defraud investors by assuring returns that in actuality are paid from the percentage of the capital acquired by the next round of investors. They often come in the way of fraudulent certificates or interest rates too good to be true.

If your financial security has been shaken because you’ve fallen prey to Ponzi Scheme sharks, the office of Shustak Reynolds & Partners wants to fight for you. Don’t lose hope. Contact us today for a free consultation.

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