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Marketing Definitions: What is a Ponzi Scheme?

How Ponzi Schemes Take Advantage of Investors

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Definition: The term "Ponzi scheme" originated in the 1920's after a shady entrepreneur named Charles Ponzi duped thousands of people into investing in mail coupons.

Ponzi promised an irresistible 40% return on investments within ninety days and collected more than $1 million dollars from over eager investors in less than three hours. To make the scheme appear as legitimate, Ponzi paid off early investors but bilked the majority of his investors.

Ponzi schemes do not pay bonuses for recruiting new investors into the scheme. Word-of-mouth testimonies from early investors is usually enough to attract new, unwary investors in Ponzi schemes.

Ponzi scam artists typically steal millions to billions of dollars from investors and flee the country before they are identified. Although prosecuting people who run massive Ponzi scams is often successful, recovering lost investments for those who have been taken usually is not.

One of the more recent Ponzi schemes involved Bernie Madoff, a well-respected American business man who stole billions of dollars from investors over a 15-year period.

Also Known As: Often incorrectly referred to as multi-level marketing which is only one form of networking marketing.

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