Ponzi scheme
A Ponzi scheme is an investment fraud that pays earlier investors with money from later investors while disguising the absence of legitimate returns.
Investor recruitment: The process of persuading people to commit money to an investment or financial product. New participants supply the cash used to pay existing investors.
Charles Ponzi: An Italian-born fraudster whose 1920 investment operation in the United States gave Ponzi schemes their name. His operation popularized the scheme's name and became its defining historical case.
Bernie Madoff: An American financier who operated a massive Ponzi scheme uncovered in 2008. His fraud illustrates how reputation and institutional access can mask fabricated investment returns.
Pyramid scheme: A business fraud in which participants earn money mainly by recruiting additional participants who pay to join. Recruitment drives both schemes, but pyramid schemes depend explicitly on participant recruitment for earnings.
Securities fraud: Deceptive or manipulative conduct involving the offer, purchase, or sale of securities. Many large Ponzi schemes involve securities and are prosecuted as securities fraud.
Fictitious returns: Reported investment gains that do not correspond to profits actually earned. False account statements make payments from new investors appear to be investment performance.
International Reply Coupon: A postal voucher exchangeable for postage in another country, created to simplify international correspondence. Ponzi claimed profits from exploiting price differences in these coupons, though the promised scale was impossible.
Harry Markopolos: An American forensic accountant who repeatedly warned regulators that Bernie Madoff's returns were fraudulent. His unsuccessful warnings highlight the difficulty of getting credible suspicions investigated.
Affinity fraud: Investment fraud that exploits trust within a shared social, religious, professional, or ethnic group. Affinity fraud describes a recruitment tactic, not the specific payout structure that defines a Ponzi scheme.
Investor restitution: The return of money or property to people harmed by financial misconduct. Recoveries after a scheme collapses can compensate victims, often only partially.