The Ponzi Scheme

kaylarStarred Page By kaylar, 17th Mar 2012 | Follow this author | RSS Feed
Posted in Wikinut>Writing>Columns & Opinions

What a Ponzi scheme is with a few examples and how to avoid them

What it is

The Ponzi, (named after the originator, Charles Ponzi) is a scheme in which money is moved from one pocket to another, the most recent investor paying the earliest.

There is no 'investment''; money is not put into some business or research, it is just redistributed.

The Ponzi pays the first batch with the money received from the investors they have brought in. The first batch, having profited, prove the scheme is legitimate, race out to bring in more investors so that they can reinvest.

As long as new investors arrive, the Ponzi can use their money to pay previous investors, and those who profited continue to reinvest. It is an increasing number of new fools handing their money to the Ponzi, who hands it to old fools, (taking a slice for himself, of course.)

Standard Ponzis

Many Schemes begin with dirty money. The Ponzi creates the scheme as a laundry. The drug baron with $500 Million dollars he can't spend, sets up a Ponzi scheme, often off shore.

A Shill ropes in local persons who become the first Directors of an 'Investment' with money provided by the Drug Baron.

The locals are respected business people who take bank loans to put up their portion, and the Ponzi is launched. The first returns to the 'investment' are paid via Drug Money. The public, being made aware that the scheme is paying a fantastically high percent on the investment are encouraged to join.

Often the shares of the locals are bought by the Shill, so that relatively honest business people are out of the loop. On paper, the Ponzi, seems to be doing fantastic business.

The Drug baron 'invests' in the scheme, and regains the Dirty Drug Money as 'Interest'. He can claim to have made his fortune through investments in the Ponzi, which he will then place in another off shore banking facility in a different country with all the certification he needs.

Hence, his $500 Million Dirty Drug Dollars may become $400 Million Clean Dollars as the investment scheme is a duly registered company somewhere, with directors, paying taxes, salaries for employees, operating bank accounts.

The Collapse

Once the drug baron's money has been washed, he has no further need of the Investment scheme. The Shill will now keep running it for his own benefit.

If he is wise, (and most are not) he will get out quickly with what he has. If unwise, he'll be arrested and his scheme will be closed.

Investors will, even after the collapse of the scheme, the disappearance of the directors, the closing of the office, continue to believe that they were actually part of a legitimate investment scheme.

They have no idea what was invested in, how the money was made, only that they gave the Ponzi $X and he gave them $XX, the first time. They reinvested $XX to gain $XXX and are waiting on their money. It never occurs to them that they were asked to bring in five fools to invest 5x $X which was used to pay them.

Why They Work

Ponzi's work because people are greedy. They work because of the elaborate marketing.

The Ponzi always appears to be a decent person, always makes money for those early investors who, if they took their money and ran would not be bankrupt today. But fools don't take the money and run. They reinvest it, most reinvest all of it. A few are wise enough to take back the original investment and only play with the 'interest.'

Ponzis work on the most uneducated as well as the most educated. They work on wage slaves as well as millionaires. Bernie Madoff ran the biggest Ponzi for the longest time. People kept reinvesting money that had long ceased to exist. The five or fifty or five hundred million dollars people believed they had in the scheme and were reinvesting had disappeared long ago.

Another Example

Factoidz writing site has long since been found to be a Ponzi scheme. The number of persons who have been ripped off is ever growing. The number of shills, those who rope people into the scheme, continues to change as old shills are discarded, new ones inserted.

As in all Ponzis, the new investor, getting a fantastic return, doesn't investigate where is money is coming from. For example, Factoidz has less ads than other writing sites. If it is the ads which 'pay' how is it that a site with so few ads can pay so much more than one with so many?

Secondly, as people are stupid they don't notice something rather odd; that many articles are written by 'Members'. Members can NOT publish writing.

How To Avoid Ponzi Schemes

Operate on the principle 'if it sounds too good to be true, it isn't true.' Where 10% is the standard interest and this scheme is paying 20%, find out HOW. And don't listen to double talk. Ask someone who knows the market.

For example, a particular Bank was paying 24% interest when others could only muster 17% for their best customers. Those who checked with their Bank Managers who were at a loss to explain how 24% could be paid, didn't put their money in the particular Bank so didn't lose their money when that Bank collapsed.

Another factor is that people who have found super investments don't tell anyone they aren't married to or share a parent with to avoid too many people sharing in the profits.

Where there are shills; "Put your money in Cash Plus! It pays twice as much as the Bank!" there is a Ponzi, as real investments don't need Shills.


Factoidz, Madoff, Money, Ponzi, Ripoff, Scam, Scheme, Standford

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author avatar kaylar
I am passionate about history, culture, current events, science and law

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author avatar Mark Gordon Brown
18th Mar 2012 (#)

My wife writes for Factoidz, she has always been paid, but they are very fussy about what they accept.

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author avatar Mark Gordon Brown
18th Mar 2012 (#)

Oh I should add she does not get a high pay per view but gets paid well for each article she writes. They have changed a lot since you were there Kaylar. That is not to say there have not been some disappointed users, but also many happy ones. It is all about being willing and able to follow their rules and accepting them.

If a person does not like the rules of a site, simply do not write for that site.

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author avatar kaylar
18th Mar 2012 (#)

It is not the rules. Many of the people who have complained to the various agencies, (those who live in America get satisfaction, those who don't are usually targetted).

The 'didn't follow the rules' argument collapsed in relations to a NUMBER of dissatisfied users. And Quac was Forced to pay them and remove their articles. This, 'you didn't obey the rules' has been proven to be a lie. What he does is steal some very good work and syndicate it without the authors name on other sites. 98k+ hits for Factoidz + Ripoff should tell you something.

There are a number of 'sacred' posters he uses to 'prove' that Factoidz is a 'real' site. Your wife happens to be one of them.

Maria C. (she is mentioned in the url I posted that links to an article written by another of the original posters) was a die hard shill who not only supported Factoidz but would race from Triond to Bukisa to Xomba to Helium Defending Factoidz until SHE was dropped to Member and her work confiscated. Sara Valor launched a Law Suit and her work was paid for and removed.

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author avatar Steve Kinsman
18th Mar 2012 (#)

Most interesting post.

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author avatar Lady Aiyanna
18th Mar 2012 (#)

The simple way of describing it in a statement or two.
It turning all bad money into good money in various methods and under company names which are just guise of underhand dealings that bring about deception to the Government eye but not the the Eye of Creation.
Giffens Paradox: When Good money chass Bad Money, Bad money becomes Good Money and that is what makes the world go round and the Good Money ends up being Vaulted as a National Treasure that brings about the actual reason for why currencies fluctuate in rates.

All money we see in this world has a Gold Reserve, its that Gold Reserve that helps IMF have the funds that people want but all said an done, the soiled notes are always taken in and destroyed to make way for new ones to come through but the Gold always remains the same.
Ceteris Paribus.

99.9% of monetary dealins go through the washing to come out clean but how clean is a question as there is always a record somewhere or the other.

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author avatar Buzz
18th Mar 2012 (#)

Wow, thanks for this info, Kaylar.

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author avatar kaylar
18th Mar 2012 (#)

Lady A; that's how come we know about these Ponzis. Because they do get exposed in the methods you have mentoned.

You are very welcome Buzz.

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author avatar Md Rezaul Karim
19th Mar 2012 (#)

Now this schemes are well practiced and cheating has been going on with the direct sponsor from the ruling party in Bangladesh.

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author avatar kaylar
19th Mar 2012 (#)

It is the people's greed that allows it. In Jamaica we've have lots of these schemes.

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author avatar M G Singh
19th Mar 2012 (#)

These schemes are very common in India. Great post

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author avatar kaylar
19th Mar 2012 (#)

In Jamaica we started with thse schemes and no amount of information could prvent a fools from parting with his/her money. I think I'll write another hub about it.

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