Ponzi and pyramid schemes are different types of large-scale investment fraud, but they are linked by a key common characteristic. In both, crooks promise participants gigantic profits from a supposed can’t-miss investment or business opportunity and sustain the illusion by luring more and more people into the scheme.
Older Americans are among the most alluring targets, the U.S. Securities and Exchange Commission (SEC) warns, because they’ve spent years amassing the savings scammers covet. Here how these schemes work.
Ponzi schemes get their name from notorious 1920s swindler Charles Ponzi (although he may have gotten the idea from an earlier scammer, William Miller, who was nicknamed “520 Percent” for the exaggerated returns he promised investors in a late-19th-century con). The basic premise hasn’t changed in more than a century: A crooked broker touts a surefire investment, guaranteeing lavish returns.
The pitch might involve a secretive strategy or, increasingly, a cryptocurrency. And for a while, it looks legit: The account balance on your statement keeps rising, and you might even be able to withdraw some cash. In reality, the crook is pocketing most of the money, issuing phony paperwork and covering up the ruse by using cash from new investors to pay old ones.
As the scammer amasses more and more investors, the ruse becomes harder and harder to sustain, but by the time it collapses your money may be long gone. Before his massive fraud fell apart in 2008, the late Bernie Madoff collected an estimated $17 billion from nearly 5,000 investors. Nearly $3 billion of that was never recovered.