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Running Head: Ponzi Schemes
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Ponzi Schemes
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Running head (Header not in proper APA format)
Ponzi Schemes Comment by Lamar, Angelo: Center please.
Latoya Smith
Bethel University
MOD 450
Dr. Angelo Lamar
February 14, 2019
Abstract
Ponzi schemes date back in 1920’s when Charles Ponzi got
involved in a disreputable money generating scheme. Initially

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the scheme had been tried without success but Charles managed
to be the first person to embezzle millions from rather ignorant
and innocent credulous people. This is the main reason the
scheme bears Ponzi’s name. Later in 2008, one of the Ponzi’s
conspirators was brought to the light. Madoff had conned
investors of their money for close to thirty years. Unfortunately,
the conned investors were all classy and literate. This paper is
aimed at providing brief history of the Ponzi schemes and an
illustration of how Ponzi schemes work. The second aim of the
paper is to give examples of historically popular Ponzi
schemers. In addition the paper provides some common
characteristics of Ponzi schemes to be able to facilitate easy
identification of illegal Ponzi schemes. The paper ends by
providing hints on how to avoid unlawful and notorious Ponzi
schemes. Comment by Lamar, Angelo: Keep up the good work
here.
Introduction Comment by Lamar, Angelo: The title to your
paper should go above this heading.
Ponzi schemes are typical fraudulent investments in which the
owner promises the investors abnormally high financial returns
from their investment. The scheme operator does not invest the
investors’ money; instead, the operator uses the funds from new
investors to pay the already existing investors their dividends.
The schemes operate smoothly until they lack adequate
subsequent investors to sustain payment of dividends to existing

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investors. This is according to the federal bureau of
investigation’s definition of Ponzi schemes. A Ponzi scheme
may also seize to operate when the notorious, illegal and
fraudulent business is discovered by the government or any
other legal authority. Comment by Lamar, Angelo: If so,
where is the citation? If information does not come from you
then give credit to where it came from.
According to the business dictionary Ponzi schemes are scams
which operate on the hope of continued increase in the number
of incoming investors to facilitate paying the returns to the
former investors. The operations come to a halt when the
amount of money getting out of the business exceeds the
incoming amount. However, the schemers are wise enough to
flee before the business crashes down. In this scenario the
schemer tends to escape with large sums of money belonging to
the investors and this equates to theft, cheat and may lead to
legal interventions. Comment by Lamar, Angelo: If so, where is
your citation? If information does not come from you then give
credit to where it came from.
History of Ponzi schemes
Ponzi scheme has its history dating back in 1920 when Charles
Ponzi got involved in a disreputable money generating scheme.
Initially the scheme had been tried without success but Charles
managed to be the first person to embezzle millions from rather
ignorant and innocent credulous people. Today Ponzi schemes
refer to an investment deception in which the conniver promises
investors of deriving high returns from an investment that is
said to have little or no risks involved. However, the conniver
uses the money contributed by a new investor to pay the former
investors. The secret behind Ponzi schemes is the ability of the
schemer to continue attracting new investors to be able to pay
returns to the already recruited investors without redress. Ponzi
schemes however tend to be discovered when the schemer fails
to convince and recruit new investors lacking sufficient funds to
pay returns to the existing investors. The scheme may also fail
when the legal channels become aware of the business

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operations. Comment by Lamar, Angelo: Where is your
citation?
Ponzi schemes have their names derived from Charles Ponzi
who was an Italian fraud and cheat who made money by
deceiving investors. The embezzler used to promise investors a
fifty percent returns on investments in approximately three
months. Annually, banks would charge interest rates of 5%
which made Ponzi preferable (Dulitzky), 2018). Ponzi schemes
became international within a very short period of time.
Eventually, Ponzi began to use new investor’s funds to pay the
existing investors. With Ponzi schemes new amounts of money
were involved and this made his strategy to become popular
unlike previous attempts to carry out this fraudulent business
and hence the name Ponzi schemes (Surendranath R. Jory,
2011). Comment by Lamar, Angelo: Why did you close the
parentheses twice? Everything belongs within. Comment by
Lamar, Angelo: Author’s last name only with date.
Popular Ponzi schemers
Bernard Madoff is one of Ponzi’s historical conspirators
((Dulitzky), 2018). He ran a Ponzi scheme for over thirty years.
In his business at Madoff Securities, Madoff managed to
embezzle millions of funds from intellectuals who found
themselves victims of this fraudulent business. It is bewildering
that indeed educated, professionals, intellectuals, society
respectable figures could so easily get swindled into losing
millions of dollars to a scheme that was formed by a simple man
named Charles Ponzi. Comment by Lamar, Angelo: What
format is this?
Madoff will remain the most popular Ponzi schemer because of
the thousands who became victims of his fraudulent business. In
December 2008, Madoff’s business was exposed and handed
over to the authorities. He pled guilty and majority questioned
his great reputation. After discovery of Madoff’s scam many
other schemes got exposed because financial authorities became
vigilant in securitizing investors in this market. Madoff’s
scheme was however the largest Ponzi scheme in the US. In

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approximation, Madoff had accumulated 65 billion US dollars.
Investors lost estimated 17.3 billion (Maglich, 2012). Half of
the investors lost money was recovered by Irving Picard by May
2012.
Allen Stanford is another fraudster through the Stanford bank
investment. He was the chairman of the Stanford Financial
group. Allen operated businesses aimed at selling certificates of
deposits to investors (Maglich, 2012). This business contained
virtually zero risk. In return Allen promised his investors high
returns that are not common in ideal investments. Stanford was
arrested, and the court ruling was postponed when Stanford
claimed a prison beating caused him to have amnesia. Stanford
was later convicted and imprisoned for twenty years in the
federal correction facility. Approximately, 4.5 to 6 Billion were
lost by investors under this scheme.
Peter’s group worldwide is another Ponzi scheme that was
owned and operated by Thomas Petters. He was a businessman
in the popular brands Polaroid and Sun Country Airlines.
Petters business was betrayed by two of his employees who
confessed to the FBI about a Ponzi scheme that had accumulated
about 4Billion US dollars (Maglich, 2012). The operator
typically engineered bank statements to obtain loans to funders.
Subsequently, Petters would then formulate purchase orders to
attract more lenders. Eventually, loans that were unpaid
accumulated and this prompted Petters to seek more from other
lenders. The airlines went bankrupt and then Petters was
arrested and convicted in 2009 for conspiracy and fraud. He was
imprisoned for fifty years in 2010. Comment by Lamar,
Angelo: All paragraphs are to be indented.
Rothstein Rosenfeldt Adler (lawyer) is another scam that
involved the sale of interests to settle lawsuits by Scott
Rothstein (Maglich, 2012). This was pure fraud because there
were no actual lawsuit settlements. Scott constructed bank
statements and legal documents in an attempt to sway and
persuade investors that the scheme was legal. Investors
continued to buy shares which supplied the scheme with

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incoming funds to pay the initial investors. The scheme was
later discovered by law firms and Scott immediately fled to
morocco carrying along millions of investors’ money. Later on
Scott was lured to return to the US and was charged with fraud
and imprisoned for fifty years upon pleading guilty. Estimated
1.4 billion of investors’ money was lost in this Scheme.
Comment by Lamar, Angelo: Indent Paragraph
Another popular Ponzi scheme is the MRI International Inc. that
was operated by Fujinaga Edwin that led to the loss of eight
hundred million US dollars of mainly Japanese investors
(Maglich, 2012). MRI International Inc. was basically a non-
existing business and the name was used to convince investors
that it was a real business. Fijinaga and MRI International Inc.
managed to convince investors that they bought accounts from
US medical and insurance advisors. This Ponzi scheme
promised investors huge profits once the targeted amount was
collected from the insurance company. The investors were
offered tour to the US to visit the MRI International Inc. office
that was located in Las Vegas and more than eight thousand
investors were conned in this scheme. Comment by Lamar,
Angelo: Indent Paragraph
Zeek Rewards is also a Ponzi scheme that led to the loss of
approximately 600 million US dollars of investors’ money. The
Securities and Exchange Commission filed a lawsuit in 2012
seeking to investigate the scheme (Maglich, 2012). The court
mandated the duty to Kenneth Bell to investigate the scheme
who found that the scheme had over 2 million members who had
invested in Zeek Rewards. The scheme sold interests to
investors through an online platform popularly linked by
zeekler.com that was not licensed. Zeekrewards.com was an
online auction site, were you could bid on products like iPad for
as low as $1, and basically it was used for, investors who
needed to cash out their money requested it online and had to
wait for the check. Zeek rewards CEO Paul Burks, however was
convicted in 2016 and sentenced to twenty years in prison for
running one of the historical Ponzi schemes in the US.

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Comment by Lamar, Angelo: Cite here.
Nevin Shapiro founded Capitol Investment USA Inc. that
promised investors exemplary returns through a grocery
business (Maglich, 2012). The business involved buying of
groceries that were lowly priced and reselling them at higher
prices. The schemer described the business as risk free and with
higher returns. The investors were promised between 10 and
26% returns from their investment. The schemer managed to
accumulate close to a billion US Dollars using funds from new
investors to repay returns to older investors. In 2011, Nevin was
charged with fraud and sentenced to, to 20 years in jail
(Maglich, 2012).
Illustration of a Typical Ponzi scheme
To elaborate how a Ponzi scheme manages to extract funds form
investors without them noticing that it is fraud, a tabular
presentation of a Ponzi scheme promising a 20% return on
investment is used.
Year
Funds Needed
Amounts Raised ($1,000s)
# of Investors
0
$ 100,000

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$ 50.00
$ 50.00
2
1
$ 120,000
$ 40.00
$ 40.00
$ 40.00

9.
3
2
$ 144,000
$ 48.00
$ 48.00
$ 48.00
3

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3
$ 172,800
$ 43.20
$ 43.20
$ 43.20
$ 43.20
4
4
$ 207,360
$ 41.47
$ 41.47

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$ 41.47
$ 41.47
$ 41.47
5
Source:
https://www.onefpa.org/journal/Pages/Ponzi%20Schemes%20A
%20Critical%20Analysis.aspx
From the table above, it is clear that initially, 100,000 US
dollars was required to start the scheme. This implies that the
schemer needed two investors each to contribute half of the
amount. A 29% return on the investment requires the schemer to
repay 120,000 US dollars to the first two investors, 600,000$
each. To generate the 120,000$ in the first year, the scheme
will need to convince 3 new investors each to contribute
40,000$ making a total of the needed amount for the first two
investors (Surendranath R. Jory, 2011). Comment by Lamar,
Angelo: Indent paragraph Comment by Lamar, Angelo: Author’s
last name and date only.
By the second year, the schemer would need 144,000$ to repay

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the three new investors which will force him to recruit four new
investors each to contribute 48,000$. By the end of the third
year, the schemer will be required to repay 57,600 $ which will
force recruitment of four new investors each to contribute
43,200$. The trend will continue until more and more investors
have been recruited into the scheme (Surendranath R. Jory,
2011). Comment by Lamar, Angelo: Indent paragraph
Ponzi schemes are however are not as simple to run as shown in
the figure above. Usually, they seek to attract many initial
investors and high initial contribution. For example, in the
Madoff’s Ponzi scheme, the scheme contained thousands of
investors and contributions were in billions of dollars. Clients
who are investors in the Madoff scheme included firms such as
Tremont group holdings, Greenwich advisors, international
banks, pension funds, insurance and medical companies, rich
individuals all representing the diverse origin of schemes
victims. Comment by Lamar, Angelo: Indent
Detecting Ponzi Schemes
To be able to avoid falling victims of Ponzi Schemes,
individuals need to be aware of the warning signs of a Ponzi
fraudulent scheme. Ponzi schemes can be detected easily
because they bear a common set of characteristics. These
characteristics are the red flags that people should get
conversant with to be able to protect themselves and their
friends and relatives from falling victims of Ponzi schemes.
Comment by Lamar, Angelo: Indent.
The most common feature of Ponzi scheme is high investment
returns zero or minimal risk (Surendranath R. Jory, 2011).
Basically, no single investment literally lacks some percentage
risk. There are no guaranteed zero risk investment and this
statement should serve as a warning that the business is a scam.
The second characteristic is the abnormally consistent high
returns (US SEC, 2018). Normal businesses fluctuate and rise
periodically. An investment that promises consistent returns
stand to be questioned. Market conditions are the factors that
dictate business returns depending with the seasons.

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Comment by Lamar, Angelo: Move up
The third feature is the lack of registration (US SEC, 2018).
Ponzi schemes are not legally registered because they operate
unlawful businesses. The schemes do not conform to state and
federal laws and thus cannot be registered. Comment by
Lamar, Angelo: Move up.
Financial investments are required by law to be operated by
professionals who must be licensed under federal and state laws
(Surendranath R. Jory, 2011). For schemers, the operators are
not professionals and neither are they licensed(US SEC, 2018).
This means that operators are unrecognized and firms are
unregistered and unacknowledged.
Ponzi schemes operate in cagey, complicated and private
premises with complex strategies and unreliable structures.
Investments need to understandable and with clear information
from which to draw information. Comment by Lamar,
Angelo: Move up
Another common feature of Ponzi Schemes is that they have no
qualifications for investing. Instead investment is open to all.
Ponzi schemes do not embrace technological based data records
but rely on paperwork (US SEC, 2018).
This is to prevent existence of evidence of fraud. Paper records
can be easily erased and manipulated. With Ponzi schemes
investors cannot easily access their investment funds. Some
usually advise investors to accumulate investment returns into
greater returns which never become a reality. Comment by
Lamar, Angelo: Move up
The last common feature of Ponzi scheme is that they make use
of affinity fraud. This entails use of a trusted individual to bring
more investors into the scheme. Comment by Lamar,
Angelo: Move up
Avoiding and Regulating Ponzi Schemes
Individuals have been provided with checklists and the red flags
of Ponzi schemes to prevent them from falling victims.
However, people still become victims either because they trust
the promoter or because they do not have adequate knowledge

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regarding the schemes. Comment by Lamar, Angelo: Indent.
When one becomes a prey in a Ponzi scheme, they are
encouraged to seek help from a financial advisor. There are
legal punishments that are accorded participation in this
fraudulent illegal business. However, a victim must seek legal
redress to expose a fraudulent business. Upon exposure, a Ponzi
scheme is sued by the Securities and Exchange Commission and
the legal system appoints a legal trustee to recover the lost
money. This benefits even the other investors who had not
realized that the investment was a scam. The money is
recovered from assets, and the consequences may extend to the
bankers of the Ponzi scheme perpetrator. Comment by
Lamar, Angelo: Indent
In cases where a Ponzi scheme perpetrator had contributed to
charity using the embezzled funds, the amount donated may be
required to be returned when the scheme is exposed regardless
of the state of the receiver. Comment by Lamar, Angelo:
Indent
Conclusion
In conclusion, Ponzi schemes are fraudulent investments that
began as early as the 1920’s. The business involves
incorporating investors into a non-existent investment
promising high returns on the investment. Investors are paid
using the funds of new investors who are convinced into the
scheme by an influential character into the scheme. Technology
and innovation in this fraudulent business are also perceivable.
The industry has grown and its products also diversified. People
need to be vigilant and be on the lookout for the warning signs
of a Ponzi scheme to avoid becoming victims. It is imperative
that investors differentiate between legal pyramid schemes and
fraudulent Ponzi schemes. Comment by Lamar, Angelo:
Indent.

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References
(Dulitzky), D. K. (2018, March 5). The Challenges of
Identifying and Preventing Ponzi Schemes. Retrieved Feb 7,
2019, from NYU JLB: https://www.nyujlb.org/single-
post/2018/03/05/The-Challenges-of-Identifying-and-Preventing-
Ponzi-Schemes
Maglich, J. (2012, May 20). Top Pozi Schemes. Retrieved Feb
11, 2019, from Ponzitracker: http://www.ponzitracker.com/top-
ponzi-schemes/
Schain, P. J. (2011). The Never Ending Attraction of the Ponzi
Scheme. Retrieved Feb 7, 2019, from Sacred Heart University:
https://digitalcommons.sacredheart.edu/cgi/viewcontent.cgi?refe
rer=http://int.search.myway.com/search/GGmain.jhtml?p2=&ptb
=53C68D6A-8052-4221-9DC4-
FD2622AF635B&n=&cn=US&ln=en&si=&tpr=hpsb&trs=wtt&b
rwsid=48bce492-f84d-4e2c-953e-
d2c542921485&st=tab&searchfo
Surendranath R. Jory, P. a. (2011). Ponzi Schemes: A Critical
Analysis. Journal of Financial Planning.
US SEC. (2018). Ponzi schemes Using virtual Currencies.
Investor Education, 1-3.
Ms. Smith please find my comments above as it relates to your
assignment. I have pointed out several errors that appear to
repeat itself over and over throughout your assignments. Try to

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make a mental note or write them down and keep it close to you
when writing to avoid these errors in the future. The
information written in the assignment itself is good along with
sentence structure and flow of thoughts, but one huge thing you
forgot is that the majority of the information used was to come
from your coursebook and not what is considered as secondary
sources. You did not learn anything in class from the listed
references so how can you construct a paper from them? You
write the majority of information from the book you learn from.
There is enough information in there to write your own book if
you desired. Remember this in the future. Have a good weekend
and I enjoyed you in class.