I'm sure you've seen them dozens of times.
Messages which purport to tell you how, for a relatively small investment,
you can make huge amounts of money. There are countless variations,
but they all are based on the same fraudulent concept. With a typical
“chain-letter”-based pyramid scheme, the process is represented to go something
There are many variations on this basic scheme.
There are various ploys used to create an illusion of legality; some of
these involve a set of “reports” which you buy from those above you, and
sell to those below you. Others instruct you to create a mailing
list out of the names of people below you. Some use language which
describes the money exchanged as a “gift” or a “loan”. There are
even some software-based pyramid schemes, centered around a program which
is distributed down the chain; the program keeps track of the list of people
from which you must buy the “codes” to “unlock” the program, enabling you
to create a version of the program which lists you as one of the sources
from which others must buy these codes to unlock it. There are also
variations which involve selling “self-replicating” web pages.
You receive a copy of a letter or an email message, making
fabulous claims about how much money you can “earn” by participating in
You send some amount of money to some number of people who
have joined this scheme ahead of you. Typically, you may be asked
to send $5 each to four or five people.
You alter the list of previous participants, removing the
one at the top of the list, moving all the other names up one position,
and adding your own name to the bottom of the list.
You send out as many copies of this altered letter as you
can, to as many people as you can reach.
As new people join the scheme below you, in exponentially-growing
numbers, each one will send you $5, or whatever the requested amount was.
Because the number of new participants is growing at a fantastic, exponential
rate, you should collect this payment from a ridiculously large number
In every case, the basic concept is the same — you
pay a relatively small amount of money to a few people above you, with
the expectation that later, very large numbers of people will be making
similar payments to you.
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Named after Charles Ponzi, who
ran such a scheme in 1919-1920. A Ponzi scheme is an investment scheme
in which returns are paid to earlier investors, entirely out of money paid
into the scheme by newer investors. Ponzi schemes are similar to
pyramid schemes, but differ in that Ponzi schemes are operated by a central
company or person, who may or may not be making other false claims about
how the money is being invested, and where the returns are coming from.
Ponzi schemes don't necessarily involve a hierarchal structure, as in a
pyramid scheme; there is merely one person or company that is collecting
money from new participants and using this money to pay off promised returns
to earlier participants.
How it all started.
Carlo “Charles” Ponzi was born in Parma, Italy 1882 and then emigrated
to the United States in November of 1903. Over the next fourteen
years, Ponzi wandered from city to city and from job to job. He worked
as a dishwasher, waiter, store clerk, and even as an Italian interpreter.
In 1917, he settled back into Boston where he took a job typing and answering
foreign mail. It was here in Boston on that fateful day in August
of 1919 that Ponzi discovered the mechanism to make both him and his investors
At the time, Ponzi was considering issuing an export magazine.
He had written a letter about the proposed publication to a gentleman in
Spain, and when Ponzi received his reply, the man had included an international
postal reply coupon. The idea behind this enclosure was quite simple.
Ponzi was to take the coupon to his local post office and exchange it for
American postage stamps. He would then use those American stamps
to send the magazine to Spain.
Ponzi noticed that the postal coupon had been purchased in Spain for
about one cent in American funds.
Yet, when he cashed it in, he was able to get six American one-cent stamps.
Just think of the possibilities if you could do this. You could buy
$100 worth of stamps in Spain and then cash them in for $600 worth of stamps
in the United States. Then cash in or sell the stamps to a third
party and you have, well, good old cash. You just can’t get this
kind of interest in the bank.
Ponzi’s mind quickly went into overdrive and devised a clever scheme
to capitalize on his idea. He was determined to be a rich man.
His first step was to convert his American money into Italian lire (or
any other currency where the exchange rate was favorable). Ponzi’s
foreign agents would then use these funds to purchase international postal
coupons in countries with weak economies. The stamp coupons were
then exchanged back into a favorable foreign currency and finally back
into American funds. He claimed that his net profit on all these
transactions was in excess of 400%.
Was he really able to do this? The answer is a definite no.
The red tape of dealing with the various postal organizations, coupled
with the long delays in transferring currency, ate away at all Ponzi’s
Things got just a bit out of hand…
A failed scheme couldn’t keep Ponzi from bragging about his great idea.
Friends and family members easily understood what he was saying and they
wanted in on the investment. And, lets face it, if you flash money
in someone’s face, they are bound to take it.
On December 26, 1919, Ponzi filed an application with the city clerk
establishing his business as The Security Exchange Company. He promised
50% interest in ninety days and the world wanted in on it.
Yet, he claimed to be able to deliver on his promise in just forty-five
days. This, of course, translates into being able to double your
money in just ninety days.
Word spread very quickly about Ponzi’s great idea and within a few short
months the lines outside the door of his School Street office began to
grow. Thousands of people purchased Ponzi promissory notes at values
ranging from $10 to $50,000. The average investment was estimated
to be about $300. (That was a big chunk of pocket change in those
You are probably sitting there puzzled. Why would so many people
invest in a scheme that didn’t work? The real reason was that the
early investors did see the great returns on their money. Ponzi used
the money from later investors to pay off his earlier obligations.
It was a new twist on the age-old pyramid scheme.
With an estimated income of $1,000,000 per week at the height of his
scheme, his newly hired staff couldn’t take the money in fast enough.
They were literally filling all of the desk drawers, wastepaper baskets,
and closets in the office with investor’s cash. Branch offices opened
and copycat schemes popped up across New England.
By the summer of 1920, Ponzi had taken in millions and started living
the life of a very rich man. Ponzi dressed in the finest of suits,
had dozens of gold-handled canes, showered his wife in fine jewels, and
purchased a twenty-room Lexington mansion.
Any get rich scheme is certain to attract the attention of the law,
and Ponzi was no exception. From the start, federal, state, and local
authorities investigated him. Yet, no one could pin Ponzi with a
single charge of wrongdoing. Ponzi had managed to pay off all of
his notes in the promised forty-five days and, since everyone was happy
to get their earnings, not a single complaint had ever been filed.
On July 26, 1920, Ponzi’s house of cards began to collapse. The
Boston Post headlined a story on the front page questioning the legitimacy
of Ponzi’s scheme. Later that day, the District somehow convinced
to suspend taking in new investments until an auditor examined his books.
(Why anyone who was doing something so highly illegal would let auditors
examine his books is beyond me.)
Within hours, crowds of people lined up outside Ponzi’s door demanding
that they get their investment back. Ponzi obliged and assured the
public that his organization was financially stable and that he could meet
all obligations. He returned the money to those that requested it.
By the end of the first day, he had settled nearly 1000 claims with the
By continuing to meet all of his obligations, the angry masses began
to dwindle and public support swelled. Crowds followed Ponzi’s every
move. He was urged by many to enter politics and was hailed as a
hero. Loud cheers and applause were coupled with people eager to
touch his hand and assure him of their confidence.
And Ponzi continued to dream. He had planned to establish a new
type of bank where the profits
would be split equally between the shareholders and the depositors.
He also planned to reopen his company under a new name, the Charles Ponzi
Company, whose main purpose was to invest in major industries around the
world. (Apparently, no one ever told Ponzi that the key to any successful
swindle was to take the money and run.)
The public continued to support him until August 10, 1920. On
this date, the auditors, banks, and newspapers declared that Ponzi was
definitely bankrupt. Two days later, Ponzi confessed that he had
a criminal record, which just worsened his situation. In 1908, he
had served twenty months in a Canadian prison on forgery charges related
to a similar high-interest scheme that he had participated in there.
This was followed in 1910 by an additional two-year sentence in Atlanta,
Georgia for smuggling five Italians over the Canadian border into the United
On August 13th, Ponzi was finally arrested by federal authorities and
released on $25,000 bond. Just moments later he was rearrested
by Massachusetts authorities and re-released on an additional $25,000 bond.
In the end…
The whole thing turned into one gigantic mess. There were federal
and state civil and criminal trials, bankruptcy hearings, suits against
Ponzi, suits filed by Ponzi, and the ultimate closing of five different
Of course, we cannot forget the problem of trying to settle Ponzi’s
accounts in an attempt to return all of the people’s investments.
An estimated 40,000 people had entrusted an estimated fifteen million
dollars (about $140 million in U.S. funds today) in Ponzi’s scheme.
A final audit of his books concluded that he had taken in enough funds
to buy approximately 180,000,000 postal coupons, of which they could only
actually confirm the purchase of two.
Ponzi’s only legitimate source of income was $45 that he received as
a dividend of five shares of telephone stock. His total assets came
to $1,593,834.12, which didn’t come close to paying off the outstanding
debt. It took about eight years, but note holders were able to have
an estimated thirty-seven percent of their investment returned in installments.
In other words, many people lost big time.
Ultimately, Ponzi was sentenced to five years in federal prison for
using the mails to defraud. After three and one-half years in prison,
Ponzi was sentenced to additional seven to nine years by Massachusetts’s
authorities. He was released on $14,000 bond pending an appeal and
disappeared about one-month later.
Where did he go? Did he leave the country? Did he just vanish
off of the face of the Earth? No one was really sure.
No, he turned up a short time later in the great state of Florida.
Under the assumed name of Charles Borelli, Ponzi was involved in a pyramid
(big surprise, huh?) land scheme. He was purchasing land at $16 an acre,
subdividing it into twenty-three lots, and selling each lot off at $10
a piece. He promised all investors that their initial $10 investment
would translate into $5,300,000 in just two years. Wow!!! Too
bad much of that much of the land was underwater and absolutely worthless.
Ponzi was indicted for fraud and sentenced to one year in a Florida
prison. Once again, he jumped bail on June 3, 1926 and ran off to
Texas. He hopped a freighter headed for Italy, but was captured on
June 28th in a New Orleans port. On June 30th he sent a telegram
to President Calvin Coolidge asking to be deported. Ponzi’s request
was denied and he was sent back to Boston to complete his jail term.
After seven years, Ponzi was released on good behavior and deported to
Italy on October 7, 1934. Believe it or not, even after all of his
swindling, he still had many fans that were there to give him a rousing
Back in Rome, Ponzi became an English translator. Mussolini then
offered him a position with Italy’s new airline and he served as the Rio
de Janeiro branch manager from 1939-1942. Ponzi discovered that several
airline officials were using the carrier to smuggle currency and Ponzi
wanted a cut. When they refused to include him, he tipped off the
Brazilian government. The Second World War brought about the airline’s
failure and Ponzi soon found himself unemployed.
Once again, he wandered from job to job. He tried running a Rio
lodge, but that failed. He then alternated between earning a pittance
providing English lessons and drawing from the Brazilian unemployment fund.
Ponzi died in January of 1949 in the charity ward of a Rio de Janeiro
hospital. Somehow, the man who had gone from poverty to multi-millionaire
and right back to poverty in a matter of six months had managed to save
up $75 to cover the costs of his burial. He left behind an unfinished
manuscript appropriately titled “The Fall of Mister Ponzi”. And what
a rise and fall it was.
What is HYIP?
At first we should explain what HYIP is. High yield
income programs are not just a network phenomenon. This term refers
to any investment bringing income more than the deposit account with
the standard rates of 4–5% per year.
There are many off-line HYIP, they are all managed
by registered companies and bring stable high income. However, the
entrance limit, the minimal investment to participate in the
project, as a rule, makes up the sum starting 500000$ and
up to tenth millions. Surely, the private investor not having
big savings is isolated from participation in the
off-line high yield programs.
For ordinary people the only way out is on-line HYIP.
On the contrast to off-line programs network high
yield income programs, as a rule, are minimally transparent.
Often the participants do not know anything about their organizers
and do not know the companys legal address. The main income
sources for off-line HYIP are the stock market games, real
estate trade and FOREX investments. On-line HYIP rarely give
true information about its commercial activity that is why the income
sources may be very different; it is often impossible
to check the information. Often the information is secret not
to hide it from the clients but with a view to keep
the know-how confidential. The competition at the HYIP
market is rather high that is why the company that is able
to offer the most rational way of managing the invested assets
has more chances to succeed.
In accordance with the interest payment periods all
on-line HYIP (further we will call them HYIP) may
be divide to every-day, every-week and monthly
ones. Every day HYIP make payments of 1..5% per day;
every-week - 7..50% per week, and monthly -
40..200% per month.
The HYIPs work principle is very simple. You register
in the system and open an account in the international
electronic settlements system and invest some money into the project. The
very next day as soon as the invested money starts bringing
profit, the mentioned payments will go to your account.
Summarizing the abovementioned we have the following scheme:
program leaders collect money from the private investors who do not
have enough money to participate in off-line high
yield income projects. Then, using their working schemes they profitably
invest it and then share the part of profits with the investors.
Actually HYIP is one of the most profitable forms of mutual
cooperation for investors. Thanks to accumulating the assets the
money that was earlier isolated from any serious economic processes make
The developed schemes enable the HYIP participants to receive the
maximally high incomes the private investors cannot reach by any
As the old saying goes, “If it sounds to good to be
true, it probably is.” Anyone who tells you you can make huge amounts
of money, with very little investment, and very little work, is almost
certainly not telling you the truth. Participating in any pyramid
scheme, ponzi scheme, or any other scheme which promises that you will
get rich quickly, with little effort is foolish at best. You will
most likely only lose money to such a scheme, and you may even find yourself
subject to legal prosecution for fraud. True wealth is only gained
through honest work, and honest investment, in enterprises which produce
goods and services of value to all. There are no shortcuts, and anyone
who tells you otherwise is almost certainly out to cheat you.
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