Ponzi scheme
Investment fraud where early investors are paid with money from new participants
A Ponzi scheme is a form of investment fraud in which the organiser promises participants a high return but never makes any real investments — instead, payouts to the earliest investors are financed entirely by money deposited by new participants. The model is named after the Italian-American fraudster Charles Ponzi, who in 1920 orchestrated one of the earliest and best-documented versions of the construction.
The arrangement works for as long as the inflow of new investors is large enough to cover the ongoing payouts. The organiser maintains the illusion of legitimate returns by issuing false account statements and fictitious investment reports, or simply by refusing to answer questions about the underlying business. When the inflow of new funds stagnates, or when many investors want to withdraw their money at the same time, the scheme inevitably collapses.
In Danish law, "Ponzi scheme" is not a separate criminal offence under that name. The conduct is instead covered by the general rules on fraud in the Danish Penal Code (straffeloven), since the perpetrator deliberately misleads investors about what their money is being used for. Depending on the specific design of the construction, the prohibition on pyramid schemes may also apply, as both models rely on the recruitment of new participants as a source of financing.
In a true crime context, the term is used above all about two of the most spectacular cases in history: Bernie Madoff's fraud, which ran over decades and amounted to losses of around 65 billion dollars, and Lou Pearlman's construction, which under the cover of music-industry success with boy bands such as *NSYNC and the Backstreet Boys defrauded hundreds of investors of more than 300 million dollars. Both cases illustrate how a Ponzi scheme can be sustained for a long time by exploiting credibility, social networks and a lack of regulatory supervision.
Common to all Ponzi schemes is that they are mathematically doomed: the system requires exponential growth in new deposits in order to honour existing obligations, and such growth can never be maintained indefinitely. The harm to investors can be enormous, as many commit their entire savings on the basis of the fraud's apparently solid results.
