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Ponzi Scheme

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Ponzi Scheme

Ponzi schemes are fraudulent investments that promise great returns for investors with

minimal risk but can only continue because new investors pay off old ones with their money

(Wilkins et al.,.2012). He was named after early-20th-century con man Charles Ponzi, who

became known for his similar scheme. The classic Ponzi scheme involves high-pressure sales

tactics to get investors to put their money into a fraudulent venture by making false promises

about the security of the investment or the rate of return. The con artist may offer referral

bonuses or other incentives for existing investors to lure in new victims.

To identify a potential Ponzi scheme, here are some red flags to look out for:

1. Promises of high returns with little to no risk: Ponzi schemes promise high returns

that are too good to be true, with little to no risk involved.

2. Lack of transparency: The scammer may need to provide detailed information about

the investment or use complex jargon to confuse investors.

3. Unsolicited offers: Ponzi schemes often involve cold-calling or unsolicited offers,

with the scammer approaching potential investors directly rather than through

legitimate channels.

4. Difficulty cashing out: Investors may need help withdrawing their funds or receiving

returns, with the scammer often providing excuses or delays.

5. Lack of registration or regulation: Ponzi schemes often need to be registered with a

regulatory agency or may be operating outside the scope of regulation.

The Ponzi scheme that Bernie Madoff ran is often used as an example of what not to do.

For nearly twenty years, Madoff ran a multi-billion dollar Ponzi scam, using capital from fresh

investors used to recoup losses from more seasoned ones and making up lies to make it look like
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the investments were legitimate. When Madoff's plan fell apart in 2008, it resulted in significant

losses for investors and ultimately led to Madoff's jail (Wilkins et al.,.2012). The continuously

high profits that Madoff promised were a red flag, as was his lack of transparency over how he

created them. Despite the magnitude of the enterprise, Madoff's company was not registered with

any governing body.

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References

Wilkins, A. M., Acuff, W. W., & Hermanson, D. R. (2012). Understanding a Ponzi scheme:

Victims' perspectives. Journal of Forensic & Investigative Accounting, 4(1), 1–19.