Thursday, December 11, 2008

Ponzi Schemes

CNN has an interesting article about a former chairman of the NASDAQ operating a multibillion Ponzi scam. I always find this kind of stuff interesting as to how people are able to successfully dupe investors or to see if someone has created a new way of scamming people.

Ponzi schemes are pretty simple: a scammer goes to investors and promises higher returns in a shorter amount of time compared to other types of investments.
The investor puts up the money, and the scammer takes the money and goes to other investors, makes the same promise, and receives more money. The scammer turns around and pays off the original investor, making good on the scammer's promise for a return in a short time period. Then, the scammer offers a higher return if the investor leaves his/her money in for a longer amount of time. The investor invests more money, and the scammer takes the larger amount of money and pays off the second set of investors, tells them the same thing told to the first investor, and the scheme goes back and forth. Either the scammer runs out of money to pay the investors, and they investigate the scammer and discover the scam, or the scammer will be able to pay out the majority of his investors, leave a few investors with diminshed returns, but not before he ultimately makes off with some money and closes the scheme before detection.

It's just that it's worrisome to see a chairman of the freaking NASDAQ to have actually operated a Ponzi scheme. What's next? Hedgefunds?
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