Everything began with Charles Ponzi who in 1920 perpetrated the fraud to which his name has been forever since attached. The structure of the Ponzi scheme is very simple, in other words, a promoter of a “Ponzi scheme” takes in investor’s funds and pays the investors “profits” from the investors’ own money or from funds from new investors.
The payment of “profits” to the investors attracts other investors, as they see an investment that is paying usually high returns and there is proof right in front of their eyes (investors are being timely paid). The important note is that these are not really “profits” because usually no profits are generated.
There are some kinds of promoters of Ponzi Schemes. The first type is a fraudster. The fraudster is the person who sets out to create a Ponzi scheme. He knows exactly how they work and usually has done them before.
Secondly, a broker brings the investor into the deal. Brokers are people who make their money from the commissions they are paid by the promoter. These commissions are a portion of the funds that the investors invest with the promoter. If the broker is productive at bringing in investment funds, the promoter will make sure that the clients of the broker are paid and that the broker’s commissions are paid. Thus, the broker can sell the investment to others with his own personal knowledge of payment and sell with added zeal. The broker becomes a true believer.
The third type of the fraudster is an affinity investor. Affinity investors are people who are associated with a group, and members of that group often include the promoter and/or the brokers. Because of being a member of the group the investors trust the promoters and/or the brokers. Often these affinity groups are religious in nature.
The following type is a center of influence investor. A “center of influence investor” is an investor who is highly respected with a reputation for being a sound citizen. He is mentioned as an investor to potential investors, and they feel that if this highly respected man is an investor, then it must be o.k. to invest. Usually the “center of influence investor” is innocent of the deeds of the promoter, and he has been sold a bigger bill of goods with even greater promises.
However, sometimes the “center of influence investor” may be a part of the scam. Or the “center of influence investor” may be an investor with a name similar to a real person or company that is credible, and the similarity in names will induce the investors to invest. For example, a trust with a prominent name attached is often used to mislead the investor to invest.
The last kind of promoters is an initially innocent promoter. A close friend or relative often will innocently induce the investor into the deal by proclaiming that he has been timely paid. In details the structure of this Ponzi scheme can be seen in this way: An initially innocent promoter usually has been told by a broker or a fraudster that he can make many times his money if he will invest with them.
Often these are high yield investment programs. The promoter usually has little or no money but he has the ability to raise money through his own contacts and through brokers. For example, he reasons that if he can raise the money and pay the investors 50% a month, then he can keep other 50% as his profit. So he raises the money from all the investors, gives it to the fraudster to invest in the 100% a month deal. Unfortunately, the fraudster steals the money.
We see that all the promoters of a Ponzi scheme can work very clever and sometimes it is almost impossible to find a difference between a real HYIP and a Ponzi scheme without real profits. The Signs of a Ponzi scheme are following:
1) Outrageous Profits. The profits are too good to be true. For example, could a real high yield investment project promise 150% a month? Never, believe me!
2) Excuses for Non-Performance. After sometime in the investment has passed, the promoter makes excuses for the non-payment of profits. He will often blame it on third parties not performing or on the actions of a government. These excuses will change from time to time, but there will always be a promise to pay followed by an excuse and non-payment.
At first the investors tend to believe the promoter but as promises of payment go unfulfilled, the investors become apprehensive. The promoter may pay some partial payments to those who seem to be the most threatening. A threat of filing a civil suit generally means nothing as this only gives the promoter more time; the court action stops everything in his favor.
Most promoters feel that they will make enough money if given enough time to pay all the investors back their principal; however, this seldom happens. On the other hand, there are some promoters who just need time to get out of town and out of the jurisdiction to avoid prosecution and payment.
3) Refusal to Return Principal. When a demand for the return of principal is made, there are more excuses followed by non-payment.
4) Term of Ponzi schemes. Most Ponzi scheme will last for at least 18 months before the excuses begin to run “thin” with the investors leading to the eventual acceptance of the reality that there are no funds to pay investors. However, some Ponzi Schemes have been kept afloat for many years before their collapse.
According to my HYIP experience, though the investors know about existing the Ponzi schemes and their signs, they still get into a Ponzi scheme and still loss their money. Certainly, most potential investors want proof that the investment is not a fraud, but you must be very careful: Ponzi schemes appear and develop constantly!