Today's blog is part two on Ponzi schemes. They're more common than you think.
Ponzi schemes are fictitious investments that pay fraudulent returns to investors, either by returning their own money or the money of new investors, and passing it off as investment return. Typically the perpetrator of the fraud uses the Ponzi scheme to fund his or her lavish lifestyle, and often there is a promise of a very high return in exchange for locking in the investment for a period of time.
Sooner or later all Ponzi schemes will collapse, but often not before leaving many victims. This could be years later if the promoter is successful in continually attracting alot of investment money.
Once you realize these Ponzi schemes are based on nothing but fake returns, you can see that there are several catalysts that will force Ponzi schemes to eventually collapse:
No new investors
No new investors mean no new money is coming in. Eventually the money will run out, and those promised returns will disappear. Investors may get a few payments or many, depending on how many new investors can be suckered in.
Market declines often cause investors to get nervous, and may result in redemptions. Depending on the amount of redemptions, there may not be enough money to continue paying the fictitious high returns, since it is really just a return of peoples' investments.
Ponzi artists are typically in it to feed their greed, egos, or both.
Read more about fraud by signing up for my blog at http://www.colleencross.com/ or read Exit Strategy, book 1 in the Katerina Carter suspense series, available in November 2011 on Kindle at http://www.amazon.com/
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