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Ponzi Scheme Essay

885 words - 4 pages

Ponzi Scheme
Corporate Finance


A Ponzi scheme is an illegal business practice in which new investor’s money is used to make payments to earlier investors. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. The returns are repaid out of new investors’ principal, but not from profits. This can continue as long as new investors line up with cash, and old investors don’t try to withdraw too much of their money at once.
Ponzi scheme is named after Charles Ponzi, known as the Father of the Ponzi scheme and the infamous swindler, ...view middle of the document...

He had started his business with a loan of $200, but within months he had two offices in Boston with a staff of dozens of employees processing sales, and he bought a modest mansion for $35,000. Of course, there were no actual profits, Ponzi had not actually bought the IRCs, and he paid early investors with the funds derived from later investors. This only worked well for him because of the rapid payments made to investors. People saw what he could do and they wanted in, so he was selling the IRC’s quickly and convincing people to reinvest their funds, he was able to postpone his financial obligations even longer. By the time the scheme collapsed his income was estimated at $1M per week, and late coming investors were defrauded of between $7 - $15M. The downfall started from some investigative journalism, this led to the District attorney getting involved and Ponzi being charged. Most of Ponzi's gains were seized in an involuntary bankruptcy hearing, and what little remained was spent in his subsequent legal battles. Ponzi’s scheme was exposed by newspaper reports in 1920 and despite his claims of innocence, a federal audit confirmed his operation was bankrupt, owing almost $4 million or more to investors. After investigation, Ponzi was charged with 86 counts of mail fraud and sentenced to five years in federal prison, and while incarcerated on federal charges he was prosecuted again on state charges in Massachusetts. Ponzi appealed that this violated his protection against double jeopardy and took the case all the way to the US Supreme Court,...

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