What is a Ponzi scheme?

Named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme in the 1920s, a Ponzi scheme is defined by the U.S. Securities and Exchange Commission as "an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity."

How do they collapse?

"With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue," says the SEC Web site. "Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out."

Red flags

The SEC lists seven common characteristics that can be warning signs of a Ponzi scheme: high investment returns with little or no risk, overly consistent returns, unregistered investments, unlicensed sellers, secretive and/or complex strategies, issues with paperwork, and difficulty receiving payments.

What is a 'typical' Ponzi schemer like?

According to Alan Stein, a Rockville Centre psychotherapist who teaches clinical social work at Fordham University, "Most of these guys don't fit the typical model for an antisocial personality. Usually an antisocial person is somebody who has conduct disorder as a child — being cruel to animals, being a bully, setting fires — typical delinquent types of behavior. It seems that most of these guys don't have that kind of behavior. Nevertheless, eventually they knowingly defraud people, which is antisocial.