Made infamous by Charles ponzi in the 20th century, and again by Bernie Madoff in the 21st century ponzi schemes have taken numerous forms over the years. But they all employ the same fundamental scam; new investor money is used to pay “dividends” to older investors. Rather than investing into a profitable, money making business, investors are investing in the fund raising prowess of the promoter. This is the fundamental fraud underlying all ponzi schemes; the lack of disclosure, and the misrepresentation of where and how dividend payments are generated.
Not all programs start out as ponzi type schemes. Oftentimes, a bad quarter or year, or a series of setbacks leads the promoter to turn to new investor funds to make dividend payments, rather than coming clean or suspending dividend payments for a time.
Investors can avoid getting involved in ponzi type schemes by asking for and reviewing a company’s financial statements prior to investing. If the amount of income being generated by the business is insufficient to pay expenses and make the promised dividend payments, it is likely that the company is using investor funds to pay some or all of the dividends.