Ponzi scheme

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“The term Ponzi scheme refers to a fraudulent scheme in which, rather than paying investor returns from investment income, initial investors are paid off with new contributions from additional investors. Black’s Law Dictionary 1198 (8th ed. 2004). Although this may appear to be a good deal for participants at the outset, the underlying economics mean that such a scheme must eventually collapse, when the flow of new funds can no longer support payments required on the earlier funds invested. On the collapse, the investors lose their remaining investments.

“Although he was not the first to dream up this type of swindle, the Ponzi scheme is named for Charles Ponzi, the head of the Securities Exchange Company, who became momentarily famous in the 1920s in Boston for selling bonds that, if held for 45 or 90 days, promised returns of 50% and 100% ‘on any amount invested.’ Mitchell Zuckoff, Ponzi’s Scheme 175, 314 (2005). Ponzi’s scheme did not pay out as promised, Ponzi’s fame turned to infamy, and Ponzi was eventually arrested and prosecuted for mail fraud. See id. at 284-88.

“Despite the apparent notoriety of Ponzi schemes, they continue to dupe investors. It has been reported that Albanian pyramid schemes netted a purported $1.2 billion after the fall of Communism in the 1980s, and that a Florida church in the 199s amassed $500 million by promising that God would double the money of pious investors. Alex Altman, A Brief History Of: Ponzi Schemes, TIME, Jan. 8, 2009, at 13. Lest one think Ponzi schemes are too simple and obvious to bamboozle the financially savvy, an oil-drilling swindle in the 1970s duped top executives at Pepsico, Time, and General Electric, as well as the chairman of U.S. Trust, the president of First Boston Corp., and an author of several books on Wall Street finance. See Donald H. Dunn, Ponzi! The Boston Swindler xi-xii (1975). Most recently, the 1008 collapse of Bernard ‘Bernie’ Madoff’s grandiose Ponzi scheme resulted in over $50 billion in investor losses, a 150-year prison sentence for Madoff, and numerous investor lawsuits that predictably will take years for resolution. See, e.g., Lautenberg Found. v. Madoff, No. 09-816(SRC), 2009 WL 2928913, at *1 (D.N.J. Sept. 9, 2009). The problems of protecting the public from Ponzi schemes are ongoing; according to the Associated Press, over 150 Ponzi schemes collapsed in 2009. Curt Anderson, ’09, The Year of the Ponzi Scam, Newsday, Jan. 2, 2010, at A27.” J. Gould, United States v. Treadwell, 593 F.3d 990, 993 fn. 2 (9th Cir. 2010).