In consumer alerts to caution consumers against get-rich- quick investment schemes that guarantee high returns.
What does it mean?
Ponzi-style schemes are cited as examples of scams where people are enticed into investing with the promise of high returns.
The returns, however, are paid out of funds from new investors entering the scheme. It all goes swimmingly until the flow of new funds starts to dry up.
The name came from convicted con man Charles Ponzi.
He took US$10 million (S$13.6 million at the current rate) from 10,000 people in Boston in the early 1920s by guaranteeing investors 50 per cent returns on investments in postal coupons after 45 days.
Why is it important?
Beware! You may lose everything that you put in a Ponzi scheme. It is tempting to invest in one because of the illustrated high returns.
The website of the US Federal Bureau of Investigation explains: 'A Ponzi scheme is essentially an investment fraud... Instead of investing victims' funds, the operator pays 'dividends' to initial investors using the principal amounts 'invested' by subsequent investors.
'The scheme falls apart when the operator flees with all the proceeds, or when a sufficient number of new investors can't be found to allow the continued payment of 'dividends'.'
In other words, money is taken from Mr B to pay initial investor Mr A. No goods are bought and sold. Neither is the money collected invested in anything.
So you want to use the term. Just say...
'This is simply too good to be true. I better find out if it is a Ponzi scheme before I part with my money.'
This article was first published in The Sunday Times on Jun 1, 2008
