business

Less than two months ago, Bernard Madoff was arrested by the FBI for securities fraud. Given the relative amounts of money involved and pain inflicted, Ponzi schemes should perhaps henceforth be called Madoff schemes.

Whatever their outward appearance, almost all such scams involve collecting money from an initial group of investors by promising them solid and sometimes extraordinary returns. The returns to the initial group come from money contributed by a larger secondary group of people. A still larger group of people contributes to both of the smaller earlier groups, and so on.

This burgeoning process continues for a while, but the number of people needed to keep the pyramid growing and the money coming in increases exponentially and soon becomes difficult to maintain. People drop out, and the easy marks become scarcer. The system collapses under its own weight when enough new people can no longer be found.

source : ABC news