Ponzi scheme

A fraud in which money from new investors is paid out to earlier ones and presented as investment returns, because the stated investment activity either does not exist or does not produce the reported profits.

Example

A fund reports a steady 2% a month for years. The money is never invested as described; each month's 'return' is funded by the next investor's deposit.

Important

A Ponzi scheme collapses when deposits slow, not when the market falls - so a long, calm track record is a feature of the fraud rather than evidence against it.

Related terms

• Affinity fraud — Investment fraud that spreads through a community whose members already trust one another - a congregation, a professional body, an alumni network, a diaspora group.
• Due diligence — The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.
• Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.

Lessons that explain it

• Fraud, and the tells that give it away — Most investment fraud does not look exotic. It arrives through someone you already trust, offers returns that are only slightly too good, and fails a small number of checks that take an afternoon. (12 min)

All 578 terms in the Investing glossary