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A recent Wall Street scandal has brought the term Ponzi scheme into the news again. Named after Charles Ponzi, a Ponzi scheme is a fraudulent investment scheme promising high rates of return with minimal risk. Typically, it generates returns by acquiring new investors whose investments then become the returns promised to early investors.

Ponzi schemes differ from pyramid schemes in that the individual(s) behind a Ponzi scheme gathers funds from new investors and then distributes them. Under the typical pyramid scheme, the individual(s) at the top does not have access to all the money in the scheme. Instead, investors benefit directly depending on the number of new investors brought into the scheme.