Scam Busting: The Father of the Pyramid Scheme

Charles Ponzi could be described as a clever businessman, or a ruthless cheater, depending upon how you look at him. I view him primarily as a charismatic leader who was able to convince people to give him large sums of money, even when they did not understand his investment scheme.

After an unremarkable professional life and a stint in prison, Mr. Ponzi devised a scheme utilizing .postal reply coupons. in the early 1900s. These coupons were included with letters to family, and the family could redeem the coupon at the post office for postage on a return letter. Mr. Ponzi.s scheme seemed simple: trade international postal reply coupons to turn a profit.

While the original premise seems plausible, the returns he promised were not. Mr. Ponzi promised investors a 50% return on their money in 45 days, or a 400% annual return. As unrealistic as these returns seemed, investors trusted him with their money.

The first few investors in the scheme did receive the returns Mr. Ponzi promised. However, at an annual rate of return of 400%, four new investors are needed each year to pay one original investor. Herein lies the pyramid scheme, also known as a Ponzi scheme. Without new investors to support those at the top, the pyramid collapses.

Under intense scrutiny, the scheme was destined to fail. When the postal reply coupon industry was examined, it was determined that there were not enough coupons in circulation to support the claims made by Mr. Ponzi. He was investigated, and ultimately sent to prison. 17,000 investors lost millions of dollars.

How do thousands of people allow themselves to be swindled out of their life.s savings? Careful scrutiny of the investment scheme should have yielded some serious concerns about the viability of investment plan. Were these investors simply unsophisticated chumps, or were they trusting individuals who bought into a dream sold by a charismatic leader?

Charles Ponzi certainly did not have a good track record professionally. But he came up with an idea that hit a hot button with immigrants. His idea incorporated .securities., which at the time were believed to be a very good path to wealth. Add to that the fact that Mr. Ponzi had investors in his scheme recruiting new participants. These early investors could testify to the profits they were paid by Mr. Ponzi.

Additional complications included the lack of information in the early 1920.s. Information traveled relatively slowly, and potential .investors. had little access to information that would have convinced them that Mr. Ponzi.s plan was actually a scheme. Lack of regulations for securities also may have contributed to the increasing amounts of money coming into the hands of Mr. Ponzi.

While the scheme devised by Charles Ponzi may have been facilitated due to lack of information and lack of regulations, the current day investors in pyramid schemes do not have those excuses to fall back upon. Millions of Americans have been swindled by pyramid schemes, disguised as business opportunities that can help individuals build wealth quickly.

These modern day Ponzi schemes are perpetuated by charismatic leaders, just as Charles Ponzi was. Their promises of fantastic investments returns are equally as outlandish, and the pyramid-like structure leads to losses for the .investors.. Yes, even in modern days, it is not very difficult to swindle unsuspecting targets.