• FURTHER READING:

A Ponzi scheme is an investment swindle whereby some early investors are paid returns from the money acquired from new investors; eventually the scheme collapses when there is not enough new investment to continue the payouts. Each year in the United States several such fraudulent schemes are uncovered and prosecuted by the Securities Exchange Commission (SEC).

The original Ponzi scheme began in Boston in 1919. Charles Ponzi, a dapper 37-year-old Italian immigrant, conceived a unique arbitrage system. Member nations of the Universal Postal Union had agreed to a permanent exchange rate not affected by currency fluctuations. Ponzi saw he could buy depressed liras and francs, turn them into International Reply coupons, and then convert the coupons into U.S. dollars for a profit of up to 250 percent. He began paying investors 50 percent interest in 45 days.

This...