What is a Ponzi Scheme? [Video]

Personal Finance Word of the Day: Ponzi Scheme [Video]

FRAUDA recent article in The New York Times reports that five of Bernard Madoff’s aides have been charged with 31 counts of fraud in relation to Madoff’s Ponzi scheme.

The U.S. Securities and Exchange Commission defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

Those who organize a Ponzi scheme usually lure new investors by promising to invest funds in opportunities that they claim will result in high returns with little or no risk.

Scammers often make an effort to attract new money in order to make payments to investors from earlier stages so that it appears as if investors are profiting from a legitimate business.

This video by Khan Academy gives an illustration of how a Ponzi scheme works.

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