• Ponzi •
Pronunciation: pahn-zee • Hear it!
Part of Speech: Adjective, Proper noun
Meaning: A type of fraud in which money is taken from investors but not invested; rather, large dividends are paid to earlier (would-be) investors with funds taken in from later (would-be) investors. The large "dividends" attract more and more investment capital until the manager absconds with the last "dividends" and remaining capital to a country having no extradition agreement with the country in which the fraud was perpetrated.
Notes: The US Securities and Exchange Commission recently charged Bernard Madoff with conducting a multibillion dollar Ponzi scheme. Mr. Madoff apparently did not understand the "absconding" part of the definition of today's Good Word.
In Play: A pyramid scheme differs from a Ponzi scheme in that participants in a pyramid scheme pay a fixed amount to someone above them in a hierarchy or "pyramid". The recipient passes most of that amount to someone above him or her, keeping an agreed-upon percentage. As the number of participants at the bottom of the pyramid increases, the point is eventually reached where there isn't sufficient money to reach the top and the scheme then usually collapses.
Word History: The eponym of today's Good Word was an Italian criminal by the name of Carlo "Charles" Ponzi (1882-1949), who discovered he could buy US Postal Reply Coupons for return postage in Italy and redeem them for stamps worth 200% more in the US. Friends who wanted to get in on the profit were offered a 50% return on their investment in 90 days. Soon, thousands of people were lining up at his 27 School Street office in Boston to invest. By 1920 Ponzi was taking in a million dollars a week, paying off earlier investors with money from later ones. Then it occurred to Ponzi that the postal coupons were superfluous, so he simply dropped them altogether but continued to rake in millions. When he could no longer pay any "dividends", he absconded to Florida, then to Texas, where he was finally arrested and deported.