Ponzi scheme

play
noun Pon·zi scheme \ ˈpän-zē- \
Updated on: 26 Jul 2017

Definition of Ponzi scheme

:an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks

Origin and Etymology of ponzi scheme

Charles Ponzi †1949 American (Italian-born) swindler


Financial Definition of PONZI SCHEME

Ponzi scheme

What It Is

A Ponzi scheme is an investment scam that pays existing investors out of money invested by new investors, giving the appearance of earnings and profits where there are none. Ponzi schemes are also known as pyramid schemes.

How It Works

The Ponzi scheme was named after Charles Ponzi, who organized a large operation to defraud investors (mostly new immigrants). Like most Ponzi schemes, he offered high and consistent returns by using money from new investors to pay off earlier investors. Ponzi went to prison when his operation was uncovered and shut down in 1910.

Ponzi schemes lure investors by promising high returns on their investment. The schemes require the continual attraction of new investors; as soon as new investors fail to materialize, the operation runs out of money and fails.

In 2008, the government uncovered a Ponzi scheme led by financier Bernard Madoff.  The scheme defrauded investors of almost $65 billion over a period of 17 years, making it the largest Ponzi scheme fraud in history.

Why It Matters

Ponzi schemes are fraudulent and illegal in most countries. They may work in the short term, but they inevitably run out of money.  Investors need to be skeptical of offers that sound "too good to be true"  and should take time to understand how their chosen investment generates profits.


Law Dictionary

Ponzi scheme

play
noun Pon·zi scheme \ ˈpän-zē-ˌskēm \

legal Definition of Ponzi scheme

:an investment swindle in which early investors are paid with sums obtained from later ones in order to create the illusion of profitability

Origin and Etymology of ponzi scheme

Charles A. Ponzi (ca. 1882–1949), Italian-born American swindler


Learn More about ponzi scheme


Seen and Heard

What made you want to look up Ponzi scheme? Please tell us where you read or heard it (including the quote, if possible).

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!

WORD OF THE DAY

smooth or hairless

Get Word of the Day daily email!

Test Your Vocabulary

Challenging Vocabulary Quiz Returns!

  • stylized-drawing-of-woman-pole-vaulting-across-gap-to-get-trophy
  • Which is a synonym of fuliginous?
Name That Thing

Test your visual vocabulary with our 10-question challenge!

TAKE THE QUIZ
SCRABBLE® Sprint

Test Your Knowledge - and learn some interesting things along the way.

TAKE THE QUIZ

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!