Ponzi Schemes Revisited

The basic structure of a Ponzi scheme (one common type is referred to as a “pyramid scheme”) is that the perpetrator entices a group of investors ' typically with the promise of unusually high profits ' who are then paid at least some part of their principal or profits from the deposits of other, later investors. Because of the continuing need to pay investors profits or principal as the scheme progresses, the perpetrator must continue to bring in more and more investors to keep it going. A Ponzi scheme relies on a strong illusion of profitability in order to attract additional victims. Madoff appears to have been a master of this illusion. As long as investors continue to join the scheme and not too many withdraw, the scheme keeps growing and growing. Until it all falls apart.

The scheme takes its name from Charles Ponzi, who sold investments in postal coupons in 1920s Boston until he was sent, predictably, to prison. Ponzi's scheme eventually collapsed under its own weight when he could no longer afford to pay his “investors.” Some Ponzi schemes are outright frauds from the start, with no part of the principal put into legitimate investments. Others, apparently including Madoff's, start out just misrepresenting what actual investments were being made but later ' usually when the market stalls ' begin to divert new investments to pay off old investors.