What is a Ponzi Scheme? Classic Ponzi scheme The history of the Ponzi pyramid

The Ponzi scheme appeared in the early 1920s, although it is impossible to be completely sure that such schemes did not exist before. It’s just that the scope of this pyramid turned out to be so huge that the scheme was able to go down in history and become a household name. It is noteworthy that about 100 years have passed since that time, and financial pyramids not only continue to exist, but also appear almost every year on an even greater scale. For example, the famous MMM pyramid, which is resurrected every year in a new guise. This suggests that there will always be people who want easy money, but the existence of such pyramids undermines the trust of real investors in new financial projects.

Read on to learn how to distinguish a financial pyramid from real investment projects and not lose your money.

The history of the Ponzi pyramid

It all started with a postal agreement that began to operate in 1906 between several dozen countries. Its essence boiled down to the introduction of uniform rules for postal exchange: unique postal coupons with the same value in each country were introduced into circulation. The coupon was included in the letter and the recipient, instead of spending money on postage stamps for a reply letter, received them in exchange for the coupon.

The scheme worked perfectly for almost 10 years until the economic condition of European countries sharply deteriorated. As a result of World War I, a financial crisis erupted in Europe, which led to a sharp imbalance in the value of postal coupons between European countries and the United States. If in Europe one coupon could be exchanged for one stamp worth 1 cent, then in the USA the same coupon could be exchanged for 6 stamps. There's just one problem: what good are these postage stamps if they can't be exchanged for real money?

The problem was solved by Charles Ponzi, who in 1919 proposed making money on the exchange rate difference by issuing bills that would make a profit. We will not go into the economic essence of the scheme; the important thing is that Ponzi was able to convince potential investors (with the help of the media) that investments could bring 100% within 3 months. Later, in August 1920, a federal agency audit of the Ponzi company would reveal that investors' money was not invested in any coupons and that investors' profits were paid out of other investors' money.

It is logical that such a scam was obviously doomed to failure, since sooner or later the flow of new investors would not be enough to fulfill obligations to old investors. But Charles was not interested in this issue at that time, and the pyramid was liquidated before this moment arrived. The result is predictable: it was not possible to return most of the money to investors; the organizer himself received a prison sentence and a fine.

A Ponzi scheme is often called a pyramid scheme. This is partly true, but there are significant points that distinguish Ponzi from the classic pyramid:

• A Ponzi pyramid has an ideological central organizer who controls the entire system and receives most of the profits. In contrast, in a regular financial pyramid there is a group of investors, which, based on the principle of MLM networks, attracts new investors who would also contribute to the influx of new clients;
• The Ponzi scheme involves not only attracting new investors, but also retaining old ones, for whom all conditions are created so that they reinvest capital. Classic pyramid schemes rely on continuously attracting new investors until the flow dries up.
• The legend formed by the organizer of the Ponzi scheme is much more convincing in comparison with ordinary pyramids. The lifespan of ordinary pyramids is several times shorter than that of a Ponzi scheme.

Ponzi Followers

1. Bernard Madoff scam. The largest fraud in history, the exact damage of which could not be calculated. According to various estimates, Madoff was able to embezzle from 50 to 64.8 billion dollars. USA, thereby deceiving about 3 million people around the world.

The enterprising fraudster began his career in 1980, engaging in trading operations on the New York Stock Exchange. He was one of the first to use electronic technologies in trading, gradually increasing volumes. Over time, under his leadership, investment funds began to appear, working with completely different assets: shares, options, etc. By the mid-90s, Madoff's reputation was so impeccable that investors from all over the world flocked to his funds. One of them was one of the founders of the Access International Advisers corporation, the Frenchman Thierry de la Villeuchet, who helped attract hundreds of millions of dollars from investors from Europe to the Madoff funds. After uncovering the scam, he committed suicide.

The principle of the pyramid was classic: the Madoff corporation attracted money from investors of other investment funds, corporations, and investor pools, which it allegedly invested in stock trading. Among the clients you can find such names and companies as Steven Spielberg, Joseph Safra (owner of banks and real estate around the world). Investors were attracted by the guaranteed return of 10-12% and the almost complete absence of management fees. But in fact, the money was paid only at the expense of other investors.

Where auditors and regulators were looking is a rhetorical question, but the scheme was able to last until 2008. According to legend, Madoff was betrayed by his own sons, but it is not possible to verify the accuracy of the information. The pyramid managed to survive for so long because Bernard was not greedy, declaring a moderate return on investment. It is believed that he could have patrons in power, but we are unlikely to ever know about this either. The pyramid no longer exists, and the organizer himself received 150 years in prison.

2. Sergei Mavrodi’s scam (MMM). We are sure that everyone has heard about this pyramid. This largest pyramid in Russia was created in 1992 and left 10-15 million people deceived. But the point is not so much about her, but about the fact that Mavrodi did not stop there. Here are just a few reincarnations of this pyramid:

• Stock Generation is a virtual stock exchange, considered the largest pyramid scheme in the history of the Internet;
• “MMM-2011: We can do a lot” and MMM-2012 are projects similar to MMM;
• Mavro is a cryptocurrency that appeared in 2016 (although in fact it is not one). At the end of 2017, the project faced a scam, followed by a restart;
• “MMM Financial Pyramid” is a 2018 project that the organizers call the Global Mutual Assistance Fund. According to legend, the project has existed since 2011, which is not entirely true.

It seems that the experience of the first MMM pyramid did not teach investors anything. It is difficult to say what motivates these people - passion or greed. But the fact remains that such pyramids will always have clients.

Other famous pyramids:

• Lou Perlman's diagram. Well-known in music circles (manager of Backstreet Boys and N"Sync), he is also known for the pyramid he built, which existed for almost 20 years. Investor losses amounted to more than $300 million. Created in 1981, the pyramid of non-existent companies was so convincing that it was able to introduce misleading even representatives of financial institutions.
• European Royal Club, which deceived German and Swiss investors for 2 years in 1992. The loss amounted to about $1 billion. USA.
• Wang Feng's ant farms. In 1999, a Chinese businessman opened an unusual company: he offered investors to buy ants for 90 days, care for them and return them at a higher price. The profitability was about 32% per annum, the turnover was about $2 billion. USA. After 14 months, the pyramid opened up.

Modern pyramid organizers have learned to perfectly disguise themselves as quite interesting investment projects. And therefore a few words are worth saying about how to recognize such schemes.

Signs of a potential financial pyramid:

• A legend that does not provide a clear understanding of how profits will be generated. Most of the simple Ponzi-type schemes are limited to general phrases that can only be convincing to those who do not have a deep understanding of the segment and financial service.
• Guaranteed return on investment. No investment fund can guarantee success. If the organizer provides such a guarantee, there is a clear sign of a pyramid scheme.
• Aggressive marketing campaign. The task of the pyramid organizer is to attract as many investors as possible, so the media, forums, social networks are used - any channels where investors are convinced of the profitability of the project, but do not focus on the idea itself. The presence of an affiliate program aimed at attracting as many clients as possible is another sign of a pyramid scheme;
• Investing without concluding any agreement.
• False licenses, lack of financial statements, statutory documents, lack of information about the founders.

No one is saying that you can’t make money by investing in pyramid schemes, but an investor must soberly assess his risks and understand the possible consequences. And in conclusion, we will answer the question of those who still doubt what Penenza is.

Why is Penenza about real investments and not about deception?

Penenza is a crowdlending platform that connects borrower and investor. This is a financial intermediary that earns a commission by quickly matching those who want to invest money with those who need that money. The operating principle of the platform is clear and transparent: targeted loans are issued to legal entities, and the details and documents of specific borrowers are visible in your personal account. The company's authorized capital is 1.5 million rubles, and with registration documents it is possible. In this section you will also find a public offer and financial statements.

And a few more points that a potential investor needs to know:

• Penenza is a member of a working group at the Central Bank of the Russian Federation, which discusses the possibility and necessity of regulating the sphere of peer-to-peer lending.
• The platform has been in existence for 2 years. And during this period, auditors and regulatory authorities did not have any complaints about her work.
• Penenza does not guarantee profitability. The company only offers to earn about 20% per annum. This profit is the result of market analysis, which showed what conditions may be of interest to borrowers and investors with minimal risks. Having a unique scoring system, Penenza successfully competes with banks and microfinance organizations, reducing the likelihood of borrower default to a minimum;
• The investor receives all the information about the scoring results of a particular borrower. All borrowers are real companies, the existence of which can be checked in the registry, as well as their representatives can be contacted personally.

Penenza is interested in professional investors who want to grow their money wisely. If you have any questions, ask them to a platform representative in the chat on the main website. And good luck with your investing!

A HYIP project is a highly profitable investment instrument that has a specially designed website with a personal account (back office) for investing electronic money. You can earn about 1-3% per day on HYIPs or even more (depending on the type of project), which attracts lovers of quick and easy profits. Due to the fact that the activities of HYIPs imply the anonymity of the organizers and the opacity of the financial actions taken, more and more fake projects began to appear on the network, which, after collecting a certain amount of investor capital, close the program. In order not to fall for the tricks of scammers, you need to understand how hype projects work.

Most existing HYIPs work on the Ponzi principle. In this article we will look at what its essence is and how to correctly analyze the activities of HYIPs in order to reduce the risks of losing investor capital and at the same time make a good profit.

What is a Ponzi scheme?

Ponzi is an investment scheme in which profits are generated by the influx of funds from new investors. Up to a certain point, the project demonstrates success and stability. Profits are regularly paid to partners, and the program grows with new participants who invest money in the project. Over time, a period of stagnation (recession) sets in, when the flow of new capital investments stops or decreases so much that it is not enough to pay the existing partners of the fund. Then the project becomes scammed and it ceases its activities.

Often, the organizers of the hype, without waiting for such a moment, immediately close the project, having collected the maximum amount of investor capital. As a rule, program partners learn about this when accrued dividends stop flowing into their accounts. There are also cases when a HYIP stops paying interest to old investors, but continues to accept deposits from new investors.

When deciding to invest in HYIPs, the investor needs to carefully analyze the activities of the project, which will determine its solvency and reliability. Only with a competent approach and the right choice of investment strategy can you make a profit on HYIP projects.

Ponzi financing - how to conduct competent investment activities?

No potential investor can be 100% sure that the chosen project is an honest investment fund, and not a financial pyramid in the bad sense of this concept. However, based on some indicators, you can draw certain conclusions that will help you understand which program you have in front of you - a scammer or a really paying project.

• Fixed profit margin. Any financial activity is associated with risks, so no honest project will guarantee a set profit;
• High interest rates. As a rule, fraudulent projects promise big profits in order to attract new participants;
• Website design and content. If a project is initially aimed at raising a certain amount of capital, as a rule, it does not have a multifunctional and reliable website. If a HYIP plans to carry out serious and long-term work, it creates a convenient and secure website;
• High affiliate fees. Most HYIPs use affiliate programs to attract potential investors. This allows you to make payments to existing members and save on advertising. If the affiliate reward is too high, you should think about it. After all, each such payment reduces the real receipts of new capital. If the affiliate percentage exceeds 10%, most likely you are dealing with a scammer;
• Too active advertising. Most often, this method is used by projects that want to raise money and close the project in a short period of time. Advertising should be moderate and not aggressive.

Despite the fact that today 95% of the investment funds existing online operate according to the Ponzi principle, such a financial instrument should not be excluded from the investment portfolio. Thanks to

A Ponzi scheme is an investment scam that initially promises investors maximum returns with virtually no risk. At the same time, profit is generated only for early investors through financing by new ones who join it. Thus, this scheme is viable exactly until the flow of investors stops, after which it will immediately collapse.

Operating principle

The Ponzi scheme got its name after the Italian swindler Charles Ponzi, who developed it. He worked as a clerk in America, first implementing the model in 1919.

We will tell you in detail about the principle of operation and the Ponzi scheme in this article. It resembles a financial pyramid in that it is also based on the funds of new investors to provide income to old investors. True, there is a key difference between these schemes. It consists in the fact that the manager first collects all the funds himself. In a financial pyramid, any of the participants in the process directly receives income. In the case of a financial pyramid, the manager does not have access to all the money in the system.

It is worth noting that, despite the difference in the principle of income distribution, both the Ponzi scheme and the financial pyramid are doomed to failure, since sooner or later the money for payments will inevitably run out.

Details

Now let's look at this system in more detail. Essentially, a Ponzi scheme is an investment scam in which an organization or individual verbally guarantees income solely through the use of new capital. At the same time, it will be attracted from new investors, and not from the profits received by new investors. With this, the Ponzi scheme pyramid attracts a large number of people due to its higher profitability. Especially compared to other types of investments.

It is interesting that sometimes a Polka Ponzi scheme can start out as a completely legitimate business, remaining so exactly until the moment when it is no longer possible to achieve the promised profitability by legal methods.

It also happens when the business itself turns into a pyramid if it begins to function on fraudulent terms. Whatever the initial situation, high returns require an ever-increasing amount of funds from new and new investors to keep the scheme alive and functioning.

Characteristics

To better understand its structure, we note that at the initial stage, all investors are promised high returns, and by investing in traditional financial instruments. For example, futures.

Fraudsters also use similar terms when they promise offshore investments that can attract a large number of investors. Thus, the promoter sells his shares through investors, taking advantage of their lack of knowledge and competence.

Almost always, such schemes adhere to an investment policy at the very beginning, investing money in hedge funds or other available financial instruments. Can turn into a Ponzi scheme and a hedge fund if the organization begins to rapidly lose its assets. At the same time, the organizers hide losses by starting to falsify auditors' reports in order to continue attracting investments.

Other examples

In the 20th century, many financial strategies and tools turned into Ponzi schemes. For example, Allen Stanford used certificates of deposit from banking organizations, with the help of which he managed to leave thousands of gullible citizens with nothing. At the same time, the certificates of deposit themselves are insured and the risks of their use are minimal. But Stanford was giving out coupons, which was pure fraud.

In every scheme, the promoter will initially fulfill his obligations to attract as many new investors as possible, while the current ones invest additional funds. With the advent of new participants, a cascade effect occurs. As a result, payments to old investors are made from money coming from new participants. At the same time, there is simply no profit.

Such high excess returns also encourage old investors to leave their money in the system. As a result, the organizer of the scheme has no need to return the money. All he can do is send regular notifications about the client’s ephemeral profits.

The organizers of such a scheme strive by all means to minimize the withdrawal of money by coming up with new investment options. If someone nevertheless decides to take the money, it is paid to him in order to maintain the myth of solvency for the other participants.

Schema disclosure

Even if such a scheme is not discovered by the authorities, it will collapse very soon. There are several good reasons for this.

Firstly, the promoter himself may disappear with all the accumulated money.

Secondly, such a scheme requires a continuous flow of investments to ensure the volume of all payments. If the flow of incoming funds slows down, the scheme will collapse, since the organizer simply will not be able to provide further payments. Such delays in liquidity usually lead to panic among investors, then most investors try to return their investments as soon as possible. These problems are reminiscent of liquidity crises that occur at large banks.

Third, external market forces may have an impact. A sharp economic downturn may prompt an investor to withdraw money. A striking example is the Madoff financial pyramid scandal in 2008.

Biography of a scammer

The scheme was named after Charles Ponzi. Having emigrated to the USA, he created one of the most original financial pyramids. It is known that he arrived in America in 1903, losing all his savings along the way, presumably he lost them in gambling. All his attempts to make money were unsuccessful until 1919, when he opened his own company with $200, which he borrowed from furniture maker Daniels.

The company he registered was called "Securities Exchange Company". She began to engage in arbitration transactions, issuing promissory notes. According to them, she was obliged to pay $1,500 for every thousand dollars received in three months.

Already in 1920, Ponzi handed over control of the company to young Lucy, and he himself moved to an expensive mansion. In the summer of the same year, the pyramid he created collapsed after a lawsuit from one of the investors, who demanded half of the profits of the entire company. According to the laws of that time, Ponzi’s funds in banks were frozen; already on July 26, he announced the cessation of accepting new deposits due to tax police inspections. This became a catastrophic mistake; investors immediately wanted to take their money back.

On August 12, he was detained, revealing a debt of 7 million dollars, despite the fact that there were only 4 million in the accounts. In October, his company was declared bankrupt, and Ponzi himself was sentenced to five years in prison.

On the loose

Once free, he did not stop financial fraud, so a few years later he was deported to Italy.

He taught English, and then, under the patronage of Mussolini, he moved to Rio de Janeiro, where he became the official representative of Italian Airlines. There he died in 1949 at the age of 66 from a cerebral hemorrhage.

Brought to life on screen

In 2014, a biographical drama called “Ponzi Scheme” was released. The film was directed by French director Dante Desart.

The tape describes in sufficient detail and clearly the operation of this scheme. Interestingly, such an idea had already appeared in literature, but Ponzi was the first to actually implement it. Similar fraudulent schemes were described by Charles Dickens in his novels Little Dorrit and Martin Chuzzlewit.

Modern adaptations

Many believe that the modern craze for cryptocurrency is nothing more than another attempt to implement a Ponzi scheme for ICOs. According to some experts, this simply kills innovation, being nothing more than a financial pyramid.

Fundraising campaigns have been accused of maximizing profits by taking advantage of the confusion surrounding blockchain technology. As a result, they manage to deceive numerous inexperienced participants in this scheme, who receive false promises, trust dubious advertising, and count on significant investment opportunities and extremely high profits.

Instead, they are doomed to fail, since such schemes remain profitable only until the supply of new money runs out.

At the same time, there are also those who believe that cryptocurrencies have nothing in common with fraudulent schemes. Many are convinced that Bitcoin will never be able to fulfill its purpose. The Ponzi scheme will be implemented again.

“Ponzi scheme” is the most common name for a financial pyramid, which was named after a real person. In 1920, Charles Ponzi created a scheme that allowed him to deprive thousands of people of their hard-earned savings.

Who is Charles Ponzi?

An Italian immigrant born in Lugo in 1882, Charles arrived in America virtually bankrupt in 1903. For the next 15 years he worked as a laborer and even went to prison for theft and counterfeiting. In 1919, the charismatic Italian set up a business in Boston offering investors the exchange of postal coupons and other securities. To attract investors, Ponzi issued promissory notes in which his company pledged to pay 50% of profits within 90 days. Unable to cope with the financial burden, Ponzi began to pay out the promised profits from the investments of new investors. After a preliminary journalistic investigation, the company's accounts were frozen, and the scheme collapsed in 1920. The founder of the financial pyramid was arrested and later deported to Italy.

Despite the fact that the financial pyramid is called a “Ponzi scheme,” the Italian was not the only or even the first founder. In 1899 in New York, William Miller received money from investors in the amount of a million dollars, promising them an incredible return exceeding 500%.

What is a financial pyramid?

The “Ponzi scheme” works according to the rule “steal from Vanya to pay Petya.” In every financial pyramid, the first investors receive the promised income through subsequent financial investments. As a rule, the source of income is disguised as commercial or investment activity. One of the most notorious pyramid schemes is that of Wall Street financier Bernard Madoff, who masterminded the largest scam in history, costing investors $65 billion.