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What is a Ponzi scheme?
Joseph T. Wells’ “Encyclopedia of Fraud, Third Edition” describes the characteristics of a Ponzi scheme:
A Ponzi scheme is an illegal business practice in which new investor’s money is used to make payments to earlier investors. In accounting terms, money paid to Ponzi investors, described as income, is actually a distribution of capital. Instead of returning profits, the Ponzi schemer is spending cash reserves, all for the purposes of raising more funds. Where a basic investment scam raises money and disappears the Ponzi scheme stays in business by circulating investor funds. There are usually little or no legitimate investments taking place. Most of the funds are used by promoters for expensive lifestyles and transferred into property or offshore accounts. Schemes typically run for at least a year, although some Ponzis have flourished for a decade or more.
The Better Business Bureau has labeled Ponzi-style financial rings “the biggest single fraud threat confronting American investors.” Highly publicized nationwide booms in real estate (1980s) and the stock market (1990s) gave rise to an epidemic of investment fraud. Every one of the top frauds cited by the North American Securities Administrators (including Internet and other high-tech scams, telemarketing, and abusive sales practices) has been run as a Ponzi scheme. According to the Securities Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA), scammers pitching phony securities cost U.S. investors between $10 and $15 billion a year – more than a million dollars an hour. Many of these scams use the Ponzi method – paying off a few early investors with other investors’ money – to stir up business. Telemarketing boiler rooms, whose fraud s cost an estimated $40 billion a year, often run Ponzi schemes.
Ponzi Enforcement
The Encyclopedia of Fraud details the FTC and SEC responsibilities in regards to Ponzi schemes:
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