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EUR: Ponzi: an age-old fraud scheme that inevitably collapses

16 Dec 2008 3:20 AM

PARIS, Dec 15 AFP - The Ponzi scheme, or pyramid fraud, is a scam named after con artist Charles Ponzi that relies on a pyramid of investors who contribute money to a fraudulent program.

Participants try to make money solely by recruiting new participants into the program.

The scheme continues today on the 'rob-Peter-to-pay-Paul' principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

In the 1920s, Ponzi duped thousands of New England residents into investing in a postage stamp speculation scheme.

According to the US Securities and Exchange Commission (SEC), the Italian immigrant thought he could "take advantage of differences between US and foreign currencies used to buy and sell international mail coupons."

He told investors he could provide a 40 per cent return in just 90 days compared with five per cent for bank savings accounts.

Ponzi was deluged with funds from investors and within six months he had made millions from the scheme, allowing him to start his own company called the Securities Exchange Company.

SEC reported on its website that in 1921 he took $US1 million during a one three-hour period.

It added that: "Although a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about 30 dollars worth of the international mail coupons."

The fraudulent system collapsed when Barron's financial newspaper observed that Ponzi was not investing in his own company and that six times as many stamps as were in circulation at the time would have been needed for his investments.

Ponzi was sentenced to several years in jail.