We all know that in investment, high returns mean high risks. As the old saying goes: no pains, no gains. We have to take high risks in order to gain large benefits, though sometimes we still fail.

What if someone comes to you saying that he has a pretty good project with no risks, if you invest, you can have 45% of return on investment in 45 days or 100% in 90 days. Would you believe him?

Well, a lot of people did in 1919. Citizens in Boston believed Charles Ponzi, a man from Italy, who claimed that he could earn a profit from selling European international reply coupons to Americans.

Charles Ponzi

A lot of people thought it was ridiculous, while some believed him. Those who believed him invested in this project and had their return in time. People were crazy. A large number of citizens in Boston invested. Ponzi soon became rich.

However, it was just a fraud. This type of exchange was called arbitrage, which is not illegal. But Ponzi couldn’t have such high rate of return on investment. Actually, he just redistributed the money. For example, when some people invested, he gave the second investor’s capital to the first investor and called this money as the first one’s return. The third investor’s capital was given to the second one. All he needed to do was to attract more people investing, therefore, he would always have money.

The fraud was revealed by the investigation of The Boston Post. After that, this kind of financial fraud was called the Ponzi Scheme.

In 2008, during the international economic crisis, another Ponzi Scheme was reported. Most victims were experienced investors and brokers, staffs from the Wall Street, even European banks.

Bernard Madoff, a respectable and reputable stock broker and investor, the former NASDAQ Chairman, was found guilty in stock and securities fraud. The case involved more than $50 billion.

Bernard Madoff

No one knew exactly what Madoff invested, but he could give 10% of return on investment for many years. Everyone believed him. When economic crisis came, his customers all asked to withdraw their money. Madoff couldn’t give them the money, he confessed to his son. His son told the police.

We should always keep calm when we invest. Always remember that high returns come with high risks. As time goes by, Ponzi Scheme is developing in more and more new forms. Keep calm and think over, hope all of us can avoid such financial frauds.

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