when the flow of new investment slows the scam artist doesn t have enough money to pay out those supposed profits that s when the ponzi scheme collapses 
origins of the ponzi schemethe ponzi scheme gets its name from a swindler named charles ponzi who in 1920 became a millionaire by promoting a nonexistent investing opportunity 1ponzi wasn t the first to perpetrate this type of fraud earlier schemes were reported in the 19th century and charles dickens dramatized the methods in two novels the life and adventures of martin chuzzlewit 1844 and little dorrit 1857 23charles ponzi s original scheme conceived in 1919 focused on the u s postal service and international mail he received correspondence from someone in spain who had prepaid international postage this international postage reply coupon could be exchanged in the u s for postage to send a reply back to spain this gave ponzi an idea 4there were tiny differences between the charges for the coupons and their redemption prices based on differences in currency exchange rates scaled up this could return a profit the concept was a form of arbitrage which is not illegal ponzi schemes rely on a constant flow of new investments to continue to provide returns to earlier investors however ponzi was hardly engaging in this practice it would eventually be discovered that he only had 61 worth of these postal coupons he was collecting money from investors and paying out just enough to keep the scheme going 4it lasted until august 1920 when the boston post began investigating ponzi s securities exchange company and its promise of a 50 return in 90 days and later just 45 days ponzi was arrested by federal authorities on august 12 1920 and charged with several counts of mail fraud he served time in federal prison 54after his release he was tried and convicted on state charges in massachusetts he then spent time running from the law and being arrested in other states before being imprisoned in massachusetts to serve his sentence following his release from state prison ponzi was deported to his native italy 45bernie madoff and the biggest ponzi scheme evercharles ponzi didn t run the last ponzi scheme in 2008 bernard madoff was convicted of running a ponzi scheme that falsified trading reports to show his clients were earning profits on investments that didn t exist madoff promoted his ponzi scheme as an investment strategy called the split strike conversion that traded in blue chip stocks and options madoff simply used historical trading data to create false records of profits from trading activity that never occurred during the 2008 global financial crisis investors began to withdraw funds from madoff s firm exposing the company s illiquid nature madoff eventually admitted that his firm had 50 billion of liabilities owed to 4 800 clients however the government determined the real size of the fraud to be 64 8 billion sentenced to 150 years in prison and forfeiture of 170 billion in assets madoff died in prison on april 14 2021 6789ponzi schemes can be carried out over decades it is suspected that madoff s ponzi scheme started in the early 1980s and lasted over 20 years 10ponzi scheme red flagsregardless of the technology used in the ponzi scheme most share similar characteristics the securities and exchange commission sec has identified the following traits to watch for 