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In April 1924, the case went all the way to the Supreme Court. The resulting decision, written by Chief Justice and former President William H. Taft, set a precedent for dealing with wreckage left in the wake of a Ponzi scheme.

Both [lower] courts held that the defendants had rescinded their contracts of loan for fraud and that they were entitled to a return of their money.... We do not agree. [W]hen the fund with which the wrongdoer is dealing is wholly made up of the fruits of the frauds perpetrated against a myriad victims, the case is different.... [This] is a case the circumstances of which call strongly for the principle that equality is equity, and this is the spirit of the bankrupt law. Those who were successful in the race of diligence violated not only its spirit, but its letter, and secured an unlawful preference.

So, the money repaid to Brown was what lawyers call “voidable”— which means it could be ordered returned to the bankrupt estate. The concept of voidability is critical to the legal battles that usually follow the collapse of a Ponzi scheme.

Ponzi served some time in jail. But, like many of the people who would follow in his steps, he got right back to work after his release. He set to selling Florida swampland. Eventually, he was deported to Italy, divorced and destitute. “I bear no grudges,” he said in his final interview with an American newspaper. “I hope the world forgives me.”

Forgets is closer to what the world actually did. In the 1930s, under the mistaken impression that Ponzi was a banking wizard, Benito Mussolini gave him a senior job in the Italian government. Treasury officials soon figured out that the wizard couldn’t handle basic math. Realizing he was about to be discovered...again, Ponzi stuffed cash into several suitcases and boarded a boat for South America.

But no one made bags big enough for the little con man. When Ponzi died in Brazil several years later, he’d been living on charity for a long while.

Elegance and Financial Alchemy

Ponzi schemes have a larcenous elegance. They’re a kind of financial alchemy, promising to turn basic human impulses like greed, trust and fear into piles of cash. For a brief time, they can make losers look like winners.

In legal terms, a Ponzi scheme is one in which money entrusted to the perpetrator is never invested in any legitimate for-profit venture. Instead, it’s gradually handed back to the investors under the fraudulent pretense that the returns are profits. They aren’t. They’re just small pieces of the capital originally invested.

The Ponzi perp will usually divert some portion of the money received for his own use. This creates a need to expand the number of investors in order to cover repayments of principal and promised returns to the existing investors. The more money the perp siphons off, the more rapidly he needs to find new investors.

Typically, investors are promised large returns on their money with little chance of losing it. “Low risk” and “no risk” are defining promises made in the early stages of most Ponzi schemes. Initial investors are actually paid the big money as promised, which attracts additional investors. But, eventually, the schemes get so big that they run out of new investors willing to support the structure.

Pyramid schemes and chain letters—close relatives of Ponzi schemes— induce people to participate in a plan for making money by means of recruiting others, with the right to encourage or solicit new memberships in the pyramid passed on to each new recruit. These schemes get their name from the flow of cash, from new members to old. The person at the top of the pyramid collects cash from all the people at the bottom.

Members are enticed to join a pyramid scheme by promises that they will earn a lot of money on a modest investment. They’re told that all they have to do is convince friends and family members to make similar investments. In reality, more people must lose money than make it. The only way for the perp to get his ill-gotten