Understanding Ponzi Schemes

Understanding Ponzi Schemes

Can Better Financial Regulation Prevent Investors from Being Defrauded?

New Horizons in Money and Finance series

Mervyn K. Lewis

A Ponzi scheme is one of the simplest, albeit effective, financial frauds to engineer, and new schemes keep coming forward. Despite this, however, people continue to invest in them. How are we to account for the seemingly never-ending lure of such schemes? In providing answers to this central question, this concise and well-researched book examines how Ponzi schemes operate, how they differ from pyramid schemes, Ponzi finance and other financial arrangements.

Chapter 3: Charles Ponzi’s scheme re-examined

Mervyn K. Lewis

Subjects: economics and finance, behavioural and experimental economics, economic crime and corruption, economic psychology, financial economics and regulation

Extract

Charles Ponzi in early 1920 became famous for eight months, but soon notorious, for his use of the financial technique that now bears his name. He emigrated from Parma, Italy to the United States in 1903 at the age of 21 and worked in a variety of jobs, from bus conductor, to office clerk to vegetable wholesaler. Described as a ‘flashy operator’ (Sarna, 2010, p. 28), and a ‘dapper and diminutive fellow, barely five feet tall’ (Bryson, 2013, p. 368), Ponzi also tried his luck getting rich quickly with basic kinds of fraud such as mail fraud and passing bad cheques (Walsh, 1999, p. 100). By the end of 1919, when he had his ‘Great Idea’, Ponzi already had two prior convictions for fraud and had spent time in prison.

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