[Music] a ponzi scheme is a fraudulent investing scam in which investors are promised a high rate of return for a short-term investment the term ponzi scheme is named after charles ponzi who promised investors an amazing 50 return within a few months he claimed that the money will be invested in international mail coupons however ponzi used the money from new investors to pay returns to earlier investors actually this scamming scheme can be traced back to the mid to late 1800s which indicates that ponzi is not the first person to use it although it is named after
him the ponzi scheme will not use the money from the investors to do some investment to get profits instead the money from later investors are used to pay the early investors as the return so to ensure that a ponzi scheme can continue working the person who runs the scheme must do two things one thing is to find new investors to keep the game running and maintain a steady cash flow another thing is try his best to prevent investors from withdrawing their funds which may cause the scheme to fall apart to do this they will try
their best to persuade investors to reinvest their return instead of withdrawing them for example suppose one day your friend bob says that you can get an annual return of thirty percent from an investment and you invest one hundred dollars after a year you get your first return of thirty dollars so you tell five friends about this great opportunity and they each invest one hundred dollars to the scheme as well at the same time bob tries his best to persuade you to reinvest the return of thirty dollar back to the scheme so bob gets five hundred
dollars for your friends since you do not withdraw your thirty dollar return he doesn't need to pay it to you right away in the following year you and your friends each receive a statement saying that your investment is worth 30 more at the same time your friends may tell this investment to their friends and the same story will continue if you or some friends would like to withdraw some of your investment bob is still able to manage it because more investors are attracted to the scheme and he has adequate cash flow to handle the small
amount of withdrawal it looks like the investment is paying out as it should and no flags are raised if some big investors are planning to withdraw a large amount of money which may deplete the money pool bob will offer them an even better return if they can change their mind and keep their investment frozen for a longer period of time say 40 a year if they can freeze their investment for five years when bob manages to attract more and more investors to this game he can still pay out some early investors who want to cash
out so early investors usually are able to get out of the ponzi schemes it's the later investors who will lose their money and investments due to the fact that ponzi schemes rely on a constant cash flow from the new investments to continue to pay returns to early investors this kind of practice is considered as illegal in most countries a recent famous example is the story of bernie madoff an american financier who executed the largest ponzi scheme in history he attracted thousands of investors to invest billions of dollars in his fake investment projects for more than
17 years the reasons that his investments are trusted by investors include the following he used to be the chair of the nasdaq in the early 1990s and his reputation makes lots of investors believe his story his investments have a high return which is in the range of 10 to 20 percent which is a good and consistent return but not crazy also all his public portfolio appeared to stick in some blue chip stocks which are considered as safe investments he also showed investors that he was using a color strategy to minimize risks which made investors believe
he was trying his best to lower the risks for his investments when his ponzi scheme fell apart in 2008 bernie madoff was sentenced to 150 years in prison and forced to forfeit 170 billion dollars in 2009 which is the largest amount in history thanks for watching if you like the video please hit the like button or subscribe button for more interesting topics [Music]
