Ponzi Scheme

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The term” Ponzi Scheme” was coined after Carlo Ponzi, an Italian immigrant who came to America in early 1900 (nineteen hundreds) to pursue an American Dream. When he settled back in Boston he decided to open up his own export/import company and while gearing for the project he learned about international postal reply coupons. IPRCs were a form of global currency, used only to buy stamps.

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In his most famous fraud, he came up an idea of taking advantage of foreign currency rates to make millions of dollars. He thought he could buy IPRC cheaply in countries whose currencies were depressed, bring them to the United States, transfer them to stamps, and then sell them to a third party for cash. This practice of taking advantage of a price difference between two or more markets, buy something in one place at a lower price and sell in another place at a higher price is known as arbitrage.

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In efforts to capitalize on this idea, he established his business known as The Security Exchange Company. He promised investors a 50 percent return within 90 days on the promissory notes based on postal reply coupon exchanges. Tempted by high returns in comparison to the bank rates that were just 5 percent at that time, people stood in long lines outside his office, willing to invest their money. While, On paper Ponzi’s idea seemed feasible, but the problem was that there weren't enough international reply coupons printed on the planet to pay back even the first group of investors. The reason why so many people invested was that the early investors did see the great returns on their money. Ponzi was paying off the interest to initial investors with deposits of new investors.

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Ponzi continued his scheme for several months, but his house of cards began to collapse when Boston newspaper revealed the fraud and reported that Ponzi was hopelessly insolvent. Thousands of victims immediately demanded refunds. Ponzi paid as...
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