What Happens to the Money in a Ponzi Scheme?

Cash Plus was formally discovered to be a ponzi scheme by the Receiver that was appointed by the court. My recollection is that the Receiver said that approximately 70 % of the funds received were used to pay investors’ principal and interest. As in typical ponzi schemes there was little to no income generating activity.

Let us look at a simplified example of why when ponzi schemes fail there is typically very little money discovered.

Let us call our ponzi scheme Lose Our Shirt & Socks, Inc (LOSS, Inc).

100 investors invest $1,000 each on January 1 in LOSS, Inc for a total investment of $100,000.

  • LOSS, Inc has little to no actual income generating activity from FX trading or other legitimate business activity.
  • LOSS, Inc pays an average return of 10 % per month. We will ignore compounding to keep it simple. Compounding makes the situation worse.

On December 31, after 1 year, only half (50) of the investors have collected their monthly interest. The Other half (50) of the investors now request redemption of their principal and interest.

  • LOSS, Inc has collected only $100,000.
  • Total interest due for the year is $120,000. 

The first half (50) collected interest monthly for a  total interest of $60,000 for the year. That means that only $40,000 i.e ($100,000-$60,000) available in the fund.

Funds available now $40,000

  • The second half (50) investors now want their principal back ($50,000) plus interest ($60,000) = $110,000 due, but the fund only has $40,000.
  • LOSS inc. in trouble!!! It only has $40,000 to pay $110,000 and that is only for 50 investors.
  • If the other 50 investors wanted back their principal the situation is worse. LOSS inc would only have $40,000 to pay $160,000 ($110,00 + 50,000).

The fund is deficit, in the red for a total of  $120,000

As you can see in this basic example and we ignored compounding, most and probably all of the money will have disappeared to pay back investors. It is gone.

Consider that in our simple example we did not factor in such expenses as legal fees, employee salaries, rent, office expenses etc. Neither did we factor in money taken by the principals and or family members to purchase such luxuries as private jets, expensive homes and cars etc.

One can clearly see that the only way the ponzi can continue is if there is a continuing influx of new investors providing new funds and or the Principals can somehow keep investors from requesting redemptions. With the occurrence of one or both of these situations, the ponzi will terminate.

Please think and check before investing. If it turns out that you invested in a ponzi scheme it is very likely that most if not all of your money will have vanished. While losses cannot always be avoided in investing, observing many basic investing principles will aid in reducing the possibilities of loss.