Get Rich Quick with Charles Ponzi,Carlos “Charles” Ponzi was an Italian immigrant who ca

Get Rich Quick with Charles Ponzi,Carlos “Charles” Ponzi was an Italian immigrant who came to America seeking opportunity and fortune in the early 1900’s.  After a few decades of hard luck, Ponzi came up with a scheme that would make him millions through the arbitrage of international reply coupons.  If you are a person or company who sends letters overseas, and you want the person whom you’d sent the letter to mail a reply back, its often a good idea to pay that person’s postage with an international reply coupon.  An international reply coupon is a coupon that can be exchanged for stamps in any country no matter what the postage rates.  In 1918 Ponzi found a way to buy international reply coupons for a discount from foreign countries, then redeem them for a profit in the United States.  Now if your wondering, “could you really make much money from buying and selling postage stamp coupons?”  The answer is, obviously not, but the international reply coupons were not the crux of Ponzi’s scheme.Ponzi claimed that he was able to turn a 400% profit by trading international reply coupons, so much so that he convinced a number of people to invest in his enterprise.  An man with a silver tongue, he convince thousands of people to invest in his get rich quick scheme, which he called the “Securities Exchange Company”.  Part of the allure of Ponzi’s investment scheme was that he offered incredible profits; a 50% return on investment after 45 days, a 100% return on investment after 90 days.So was Ponzi really turning a 400% profit by selling postage stamp coupons?  Of course not, the whole business was a huge scam.  Rather than truly investing the money of his clients, he simply pocketed the cash and paid off old investors with money from new investors.  So if a person invested $100 with a guarantee of a 100% profit, that person would expect a sum of $200 to be paid out.  What Ponzi did was pocket the $100, then convince three other schmo’s to invest $100 dollars each.  He would then take that $200 to pay off the first investor, while pocketing the other $100. The picture above shows how the scheme works, notice how it looks like a pyramid, and the base gets bigger with each cycle. This cycle would continue, with Ponzi pocketing thousands of dollars of investors money, while recruiting new investors bring more cash into the scheme so he could pay off other investors.  Thus no one would ever suspect that he wasn’t really investing in anything.Today such a scheme is called a “Ponzi scheme” in honor of Charles Ponzi.  Conducting a Ponzi scheme is illegal and considered fraud by the Securities and Exchange Commission.  The reason why is because a Ponzi scheme is mathematically impossible to operate and destined to collapse.  As the scheme grows, the fraudster will need to recruit more and more new investors who are willing to invest greater sums of money to pay off old investors.  The fraudster will find that each wave of new investors has to be exponentially bigger than the last for the scheme to work.  Eventually, the fraud will find that he will need every man, woman, and child on the entire planet to invest all of their money in the scheme.  Needless to say, a Ponzi scheme is unsustainable.By 1920, two years after he had began his scheme, Ponzi was living a life of luxury and making $250,000 a day.  However the cracks in his scheme began to show when he had difficulty paying off his investors.  This launched an investigation into his business.  During the investigation it was discovered that the US Postal Service was not selling international reply coupons to Ponzi.  Despite the discovery, Ponzi’s charm and silver tongue convinced many people to continue investing.  Finally in August of 1920 Charles Ponzi was in a situation where he had to pay off his investors, but he did not have any more money, nor could be recruit new investors to infuse more cash into the scheme.  Instantly, the entire scheme came crashing down.  The next day Charles Ponzi was arrested for fraud.  He plead guilty and spent 14 years in jail.  After his release he was again arrested for partaking in real estate fraud, and thus spent even more time in prison.  He passed away in 1949.  Thousands of people who invested in his scheme lost all their money.  Altogether Ponzi’s scheme lost his investors over $20 million.Today the legacy of Ponzi continues.  In 2008, the wealthy stockbroker Bernard Madoff confessed to the authorities that his stock brokerage company was a giant Ponzi scheme.  Altogether losses from the Madoff’s Ponzi scheme amounted to a whopping $65 billion, the largest Ponzi scheme in history.  Currently Bernie Madoff is on year 6 of his 150 year federal prison sentence. -- source link

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