What is a Ponzi scheme?

Running a Ponzi scheme constitutes one of the federal white collar crime charges you could face in West Virginia.

A Ponzi scheme represents a type of financial fraud, the penalties for which are quite severe if you receive a conviction.

The original Ponzi scheme

The term “Ponzi scheme” is named after the first person who ran one. Charles Ponzi was an Italian immigrant who lived in Boston in the 1920s. There he came up with a scheme to con people out of their money by selling them fraudulent international reply coupons. This was back in the time well before the advent of email, cellphones, etc. When someone sent a snail mail letter to a foreign country, (s)he usually enclosed an international reply coupon that paid for the recipient to send a reply.

Ponzi bought up large quantities of international reply coupons in Europe since they were priced lower in those countries than they were in the U.S. Then he sold them to unsuspecting Americans, to whom he promised a 50 percent “investment” return within three months if they, in turn, resold them to other people. Ponzi’s initial customers actually did make money on their “investments.” The problem arose with the subsequent “investors.” Since the Ponzi scheme worked like a classic pyramid scheme, the farther down the chain any particular investor stood, the less money (s)he made. In addition, Ponzi paid off his initial tier of investors with the money he collected from the second tier, and on down the line.

Ponzi (and the feds) quickly discovered that only so many international reply coupons existed in the entire world. Once the feds put the numbers together, they found out that while only around 27,000 international reply coupons existed worldwide, Ponzi’s supposed sales were for more than 160 million of them. They issued two federal indictments against him, consisting of 86 counts of mail fraud. Ultimately Ponzi pleaded guilty to a single count and served five years in federal prison.

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