by Roberrific

Created on: February 22, 2007   Last Updated: April 12, 2011

An old sales adage reads if people can be made to believe, they can be sold anything.'

A Ponzi (or Pozzi) scheme is a simple investment scam that hides behind the disguise of a new or poorly understood investment instrument. In a typical Ponzi scheme, early investors are paid funds in the form of interest payments from later investors. Initial investors may receive interest payments, but as the pool of potential investors dries up, all investors will loose any funds invested.

Here's how it works - at first investors believe they are putting money into a legitimate investment, although too complicated to be completely understood. Ponzi scam artists present the investments as legitimate, and may go to great lengths to make it look professional. In reality, the investment is simply a method the scam artist uses to swindle money. They may make the investment look like it is performing, with interest payments paid early on, but this is just a way for the scam artist to make the investment look successful. The scam artist is using money from new investors to fund any such payments. There will come a time when the scam artist disappears with any funds they have received from investors.

Carlo "Charles" Ponzi was born in Parma, Italy 1882 and then emigrated to the United States in November of 1903. Over the next fourteen years, Ponzi wandered from city to city and from job to job. He worked as a dishwasher, waiter, store clerk, and even as an Italian interpreter. In 1917, he settled back into Boston where he took a job typing and answering foreign mail. It was here in Boston on that fateful day in August of 1919 that Ponzi discovered the mechanism to make both him and his investors very wealthy.

At the time, Ponzi was considering issuing an export magazine. He had written a letter about the proposed publication to a gentleman in Spain, and when Ponzi received his reply, the man had included an international postal reply coupon. The idea behind this enclosure was quite simple. Ponzi was to take the coupon to his local post office and exchange it for American postage stamps. He would then use those American stamps to send the magazine to Spain.

Ponzi noticed that the postal coupon had been purchased in Spain for about one cent in American funds. Yet, when he cashed it in, he was able to get six American one-cent stamps. Just think of the possibilities if you could do this. You could buy $100 worth of stamps in Spain and then cash them in for $600 worth of stamps in the

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