Ponzi Schemes or Pyramid Schemes

A classic type of investment fraud is a Ponzi scheme. Investors who put money into early-stage companies are often told about the high rate of return and low risk. The reports they receive give inaccurate, upbeat performance reports about their investments, and they may receive early distributions of the “profits” that have been stolen from other investors’ accounts. Investing in the early stages is beneficial, but doing so carries the risk of total loss for subsequent participants.

Frauds, particularly pyramid schemes, are frequently compared to pyramid schemes, in which funds obtained from the newest participants are used to pay earlier investors at the upper levels of the pyramid. The money showman (the “promoter”) stands on the stage directing the flow of funds and taking all of the cash that is offered.
Ponzi scheme works as follows:

One of the main responsibilities of the promoters of a Ponzi scheme is to keep pulling in new victims. Those who invest in the early stages of a startup might be asked to introduce their friends and family to the project and talk about their experience with other people.

Since investors request withdrawals and redemptions, those requests can cause a liquidity crunch for Ponzi scheme promoters. These scammers literally crumble when the flow of new money is cut off. Promoters who run these schemes leave town, leaving the money behind, and only when this happens are they found to be fraudulent.

During the decade before the Great Depression, Charles Ponzi developed the scheme, which later came to be known as a Ponzi scheme. He made $20 million (equivalent to $250 million in today’s economy) by convincing individuals to buy international stamp arbitrage and trading schemes, which promised returns of 50% to 90%.

Since that time, the size and ambition of such projects has increased considerably. The most infamous recent case is Bernie Madoff, who successfully ran his Ponzi scheme for many years until it came crashing down in 2008. This is what happened the following year: After serving his 150-year prison sentence, Bernie Madoff was ordered to pay restitution of $170 billion.

Implying something ‘the next big thing’ is on the horizon

Ponzi scheme promoters can be savvy trend-spotters who take ideas from current news events and innovative technologies when coming up with their sales pitch. A recent example of investment fraud tied to cryptocurrency is the rise of fraudulent coin offerings.

The CFTC sued several promoters of a digital currency known as “My Big Coin” who collected $6 million from investors in January 2018. Those investors presumably tried to repeat the magic that had previously made Bitcoin so valuable. Even though the promoters had promised, My Big Coin never in fact became a viable commodity that could be traded on currency exchanges, and it was also not ‘backed by gold’ as they had stated, as revealed by the CFTC. About 95% of all funds solicited from investors have been alleged to have been embezzled. In an official complaint, the promoter’s customers allege that the promoters transferred customer funds into their personal bank accounts, and used the money to pay for expensive art, travel, and luxury goods.

Many perpetrators of Ponzi schemes have gotten away with their crimes; their names haven’t made headlines, and their fraudulent activities remain live and successful.