[pon-zee] 
| a swindle in which a quick return, made up of money from new investors, on an initial investment lures the victim into much bigger risks. |
| Pon·zi scheme (pŏn'zē) n. A fraud disguised as an investment opportunity, in which initial investors and the perpetrators of the fraud are paid out of funds raised from later investors, and the later investors lose all funds invested. [After Charles Ponzi (1882?-1949), Italian-born speculator who organized such a scheme (1919-1920).] |
Ponzi Scheme
A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates return by acquiring new investors.
Investopedia Commentary
The Ponzi scam is named after Charles Ponzi, a clerk in Boston, who first orchestrated such a scheme in 1919.
Although a Ponzi scheme is similar to a pyramid scheme in that both are based on new investors' funds to pay the earlier backers, they differ in that the Ponzi mastermind signs up new investors, who are used to attract potential investors, rather than the hierarchical pyramid setup whereby all the investors do the recruiting. Eventually, there isn't enough returns to go around and the schemes unravel.
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See also: Bre-X Minerals Ltd., Caveat Emptor, Prime Bank, Pyramid Scheme, ZZZZ Best