A Ponzi scheme is a confidence game or financial fraud, named after Charles Ponzi, a flamboyant Boston man who swindled thousands of people in 1919-20, and went to prison for it.
The schemer offers very high returns, using a winning personality that overcomes the reluctance of investors. Supposedly the schemer has a secret sure-fire technique for making money legitimately; everyone assumes he is honest. The first and second rounds of investors put in money, and the first round gets large returns as promised; word spreads. The money given to the people in the first round comes from the second round investors. Then the money from the third round investors is used to pay off the first and second round. The money from the fourth round--assuming it lasts that long, is used to pay off the first, second and third groups. The supposed genuine investments never took place. The scheme continues as long as more and more people flock to invest. Ponzi schemes typically collapse after a few rounds.
By far the largest Ponzi scheme was discovered in December 2008, when it appeared that well-respected New York City financier Bernard L. Madoff had bilked investors worldwide out of vast sums, perhaps as much as $50 billion over a period of decades. Madoff was sentenced to 150 years in prison in June 2009. Another large scheme involving $7 billion resulted in R. Allen Stanford being sentenced to 110 years in prison in June 2012.
State and federal offices are supposed to be watchdog agencies, but the federal Securities and Exchange Commission ignored numerous warnings that Madoff was running a Ponzi scheme.
Investors in the Madoff scheme paid taxes on their supposed "profits" (they may be able to recover some of the taxes for the last two years), and they can deduct their losses from their income taxes, so that they will recoup some of their losses. The many charities that lost money will not get any tax refunds because they do not pay any income taxes.
- Daniel Gilbert and Jean Eagleham. "Stanford Hit With 110 Years", Wall Street Journal, June 15, 2012, p. C1.