All too often, investors are duped into making an investment that promises extraordinary returns, later discovered to be a “Ponzi Scheme”.1 The term Ponzi Scheme was coined following the discovery that Edward Ponzi, during the 1920’s, had duped thousands of investors out of millions of dollars, by paying out very high investment returns to his investors by using later investors’ money to pay back earlier investors, all the while taking huge amounts of the investors’ money to fund a lavish lifestyle for himself.2
A Ponzi scheme is, in essence, a financial fraud that usually induces investment by promising extremely high, risk-free returns, in a short time period, from an allegedly legitimate business venture.
The fraud consists of funneling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment.
– In re United Energy Corp., 944 F.2d 589, 590 n. 1 (9th Cir.1991)
Sometimes a legitimate business later morphs into a Ponzi scheme as well.3