A Brief History Of: Ponzi Schemes

His methods and motives remain cryptic, but the carnage unleashed by Bernard Madoff is beginning to be revealed: in a New York City federal court, where the former Nasdaq chairman stands accused of masterminding a $50 billion Ponzi scheme; in congressional hearings; and in the Manhattan office of a French financier who killed himself after Madoff bilked him and his clients out of more than $1 billion.

Ponzi Schemes--in which a swindler touts outsize returns, parries questions about legitimacy with hefty dividends and creates the illusion of solvency by paying off early investors with capital raised from later entrants--are named after Boston businessman Charles Ponzi. From 1919 to 1920, the Italian immigrant coaxed thousands of people into sinking millions of dollars into a complex deal involving international postage rates, which he said would earn a 50% profit in 90 days.

Ponzi wasn't the scam's first practitioner; that was probably a New York City grifter named William Miller, who fleeced investors out of $1 million--more than $20 million in today's dollars--in 1899. The cons have since grown: a Florida church netted $500 million in a 1990s fraud that promised God would double the money of pious investors. Boy-band impresario Lou Pearlman, in addition to foisting 'N Sync on an unsuspecting public, stole $300 million from clients over two decades. And citizens poured some $1.2 billion into Albanian pyramid schemes after the fall of communism; when the schemes collapsed in 1997, investor outrage toppled the government. Still, Madoff's $50 billion scam would be the biggest ever--except to those who say the risky trading in mortgage-backed securities was a Ponzi scheme of its own. The price tag for that crisis is already in the hundreds of billions.