Editing Ponzi scheme (section)

== Methods ==
Typically, Ponzi schemes require an initial investment and promise above-average returns.<ref>{{Cite web|title=What is a Ponzi scheme?|url=http://www.mijiki.com/what-is-a-ponzi-scheme.html|work=Mijiki|publisher=Mijiki.com|access-date=23 June 2012}}</ref> They use vague verbal guises such as "[[Hedge (finance)|hedge]] [[Futures contract|futures trading]]", "[[high-yield investment program]]s", or "[[offshore investment]]" to describe their income strategy. It is common for the operator to take advantage of a lack of investor knowledge or competence, or sometimes claim to use a proprietary, secret investment strategy to avoid giving information about the scheme.
[[File:Ponzi1920.jpg|thumb|Charles Ponzi]]
The basic premise of a Ponzi scheme is "[[to rob Peter to pay Paul]]". Initially, the operator pays high returns to attract investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The schemer pays a "return" to initial investors from the investments of new participants, rather than from genuine profits.

Often, high returns encourage investors to leave their money in the scheme, so that the operator does not actually have to pay very much to investors. The operator simply sends statements showing how much they have earned, which maintains the deception that the scheme is an investment with high returns. Investors within a Ponzi scheme may face difficulties when trying to get their money out of the investment.

Operators also try to minimize withdrawals by offering new plans to investors where money cannot be withdrawn for a certain period of time in exchange for higher returns. The operator sees new cash flows as investors cannot transfer money. If a few investors do wish to withdraw their money in accordance with the terms allowed, their requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent and financially sound.

Ponzi schemes sometimes begin as legitimate investment vehicles, such as [[hedge fund]]s that can easily degenerate into a Ponzi-type scheme if they unexpectedly lose money or fail to legitimately earn the returns expected. The operators fabricate false returns or produce fraudulent audit reports instead of admitting their failure to meet expectations, from which point on the operation can be considered a Ponzi scheme.

A wide variety of investment vehicles and strategies, typically legitimate, have become the basis of Ponzi schemes. For instance, [[Allen Stanford]] used bank [[Certificate of deposit|certificates of deposit]] to defraud tens of thousands of people. Certificates of deposit are usually low-risk and insured instruments, but the Stanford certificates of deposit were fraudulent.<ref>{{Citation | last=Kurdas | first=Chidem | year=2012 | title=Political Sticky Wicket: The Untouchable Ponzi Scheme of Allen Stanford | publisher=CreateSpace Independent Publishing Platform | isbn=978-1479257584 }}</ref>