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Ponzi scheme

A Ponzi scheme is an investing fraud in which early investors are paid with money taken in from new investors.

Expanded Definition

Named for Charles Ponzi, who duped thousands of New Englanders into investing in a postage stamp speculation scheme in the 1920s, Ponzi schemes, like all pyramid schemes, are illegal.

The schemes promise large returns, but the investing necessary to make those returns possible is not actually being done. When the investors who put in their money early get paid (using not investing returns, but investments from those who join later) success seems evident. But the scheme will eventually collapse.

The SEC says Ponzi schemes operate on the "rob-Peter-to-pay-Paul" principle. Victims can be financially wiped out.

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