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How a Ponzi scheme works

A Ponzi scheme is an investment scheme that creates the illusion of wealth. It is often advertised as an investment tactic that is nearly too good to miss. People will often talk about how it can do well even when the economy is doing poorly, so the results are guaranteed and it appears that it's a safe bet.

This is often very attractive to investors, especially when trying to build up a stable portfolio for retirement. They need something that is reliable. They don't want to be crushed when the market collapses, losing everything they'd saved up for years and perhaps decades.

However, a Ponzi scheme isn't as stable as it seems. The problem is that those running the scheme simply take the money that the new investors are putting in. They then shift that money over to the accounts owned by the older investors to pay returns. This is shown as "earnings" that were made through the investments, so the older investors think that the plan is working well. They appear to be earning just what they were promised.

As long as new investors are coming in and providing money, this can keep working. When these investors stop coming or start trying to leave, though, everything unravels and it turns out that many investors no longer have any money in their accounts, as it was used to pay others who invested before them.

Financial schemes like this can be quite complex, and an intricate knowledge of both finances and the law is needed when a case goes to court. Those who have been accused of running Ponzi schemes need to know their rights and how they can set up their defense strategies in court.

Source: Bankrate.com, "5 ways to recover from a Ponzi scheme," Greg Saitz, accessed July 08, 2016

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