Ponzi Scheme
Definition
A fraudulent investment operation in which a central operator pays returns to existing investors using capital from new investors, creating the false appearance of legitimate investment activity. Named after Charles Ponzi.
- Named after
- Charles Ponzi
- Mechanism
- Pays existing investors with new investors' capital
- Collapse trigger
- Withdrawals exceed new inflow
Common questions
How do investigators typically detect a Ponzi scheme?+
They trace fund flows and look for the absence of any real underlying investment activity generating the reported returns, since the returns are instead being funded by newer investors' deposits.
How does a Ponzi scheme differ from a pyramid scheme?+
A Ponzi scheme is run by a central operator who directly manages all the money, whereas a pyramid scheme relies on each participant recruiting new participants beneath them to keep the payments flowing.
Related terms
- Affinity Fraud
- A variant of Ponzi or investment fraud targeting members of a defined community (religious, ethnic, professional). The operator exploits existing trust networks...
- Clawback
- A receivership or bankruptcy action to recover payments made to investors (including fictitious profits and sometimes principal) before the scheme collapsed. Clawback...
- Net Winner / Net Loser
- Classification of investors based on whether they withdrew more (net winner) or less (net loser) than their original principal. In Ponzi receiverships,...
- Pyramid Scheme
- A recruitment-based structure in which participants earn fees or commissions primarily by recruiting new participants rather than from genuine product or service...
- Receiver / Trustee
- A court-appointed officer who takes control of the scheme operator's assets after collapse, marshals remaining funds, investigates the fraud, pursues clawback claims,...