General Question

sfgal's avatar

what is a Ponzi scheme?

Asked by sfgal (280points) September 20th, 2007

I have heard the phrase thrown around but am embarassed to admit I don’t know what it refers to.

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7 Answers

extolsmith's avatar

I believe it is a piramid scheme. A business where profit is gathered from investor who in turn gather profit from future investors and so on, all the while passing a peice of future profit up the chain, with the top receiving income from all who paticipate. This business can function in many industries and claim to provide or sell quite the assortment, but initial investment is the primary source of income and fraud. These businesses are patiently prohibitated by law.

hossman's avatar

I must differ from extolsmith, a pyramid scheme is not the same as a Ponzi scheme. A pyramid scheme requires new participants in the scheme to recruit new participants. The newest participant, in addition to recruiting even newer participants, also sells the product or service. Frequently, each participant is required to pay initial fees to be part of the scheme. A portion of the fees earned from the newest participant, as well as a portion of the profit from their sales, is paid to the participant who recruited them, a portion of that participant’s income from the participants below them and the profit from their sales is paid to the participant who recruited them, and so on up the ladder. A pyramid “scheme” is not necessarily illegal, so long as full disclosure is made of the way the organization works and there is some product or service being sold and the income is not entirely from recruitment. In theory this is not all that different from the way many franchises are set up. Many legal “pyramid” businesses exist, perhaps the best known is Amway. The key is that the participants cannot be deceived as to the true income potential and that they are not fraudulently recruited simply to obtain their initial fees.

A Ponzi scheme, on the other hand, is entirely fraudulent. Participants are sold on some fictional business or investment, usually investments. Frequently these are fraudulently promoted as associated with a charity, and churches and church members are a frequent target of these scams. Once the criminal running the Ponzi scheme has enough participants, they take part of the money from the newest participants and pay it to the older participants, who believe it is the return on their investment. Those older participants tell new recruits about this wonderful investment, and more money comes in, which is used to pay the next people in line. The participants are unaware it is a scam because they initially receive good returns. Eventually, the scam artist allows the Ponzi scheme to fold after he has milked most of the funds out of it. A couple of recent examples: church members were told there was a wealthy Christian who had passed away, leaving hundreds of cars which his will specified were to be given to other Christians. The church members were told they had to first make a payment to the estate to cover the “taxes” on the vehicles. Some of the initial participants actually received cars, which of course stimulated new recruits. Another Ponzi scheme a few years ago managed to deceive some major Christian organizations, including Moody Bible Institute and others. Participants were told a group of successful Christians who wished to remain anonymous would “invest” money from those organizations, and also match the funds. Initial participants received large returns on the funds they invested, which of course stimulated new participants. The scammer had set up a complete dummy charitable organization, complete with offices, and had hired some very credible employees. Of course, eventually it collapsed after the guy who set it up pulled his seed money out along with very large investments by a number of Christian colleges, investment groups and charities.

jvgr's avatar

Pyramid schemes evolved from the chain-letter with money.
No products sold, just voluntary donations.
Pyramid schemes, as described above, may not be illegal everywhere, but there is enough known that new entrants call them:
Reverse Funnel Schemes.

What they have in common is: the sooner you are involved, the more you will make (or the less you will lose).

Since the Mortgage Backed Security scheme has got us where we are: what would you call it.

bolt's avatar

ok. than what is amway?
and intway?

bolt's avatar

and whta is ?

180 mln usd in scammed money from pastor Sunday wired to bank of Nigeria?

ItsAHabit's avatar

Many people argue that Social Security and Medicare are Ponzi schemes and that they would be illegal if operated by anyone other than the government.

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