A more thorough explanation:

A Ponzi scheme is a type of investment fraud where investors are promised high returns with little or no risk. The scheme works by using funds from new investors to pay off earlier investors and the perpetrators of the fraud. However, there is usually no actual business activity that generates revenue. The scheme can only continue as long as there is a consistent flow of funds from new investors. The scheme collapses when there are too many investors demanding their money back or when there are not enough new investors to sustain the scheme.

For example, suppose a person starts a Ponzi scheme and convinces ten people to invest $10,000 each. The person promises a return of 20% in six months. After six months, the person pays $2,000 to each of the ten investors from the funds of ten new investors who invested $10,000 each. The original ten investors are happy with their returns and may even invest more money. However, the scheme collapses when there are not enough new investors to pay off the earlier investors.

Ponzi schemes are named after Charles Ponzi, who defrauded thousands of investors in Boston in the 1920s. Ponzi schemes are illegal and pose a significant risk to investors. Victims of Ponzi schemes often lose billions of dollars every year in the United States. Legal remedies for victims are often limited because the funds are usually gone, and the perpetrators of the fraud may have hidden their assets.

Enforcement against the schemers can be made by individuals and governments with potential civil and criminal remedies for charges like securities fraud, fraudulent transfer, and disgorgement. However, many legal difficulties arise in determining which funds a bankruptcy trustee and court can access and who receives which part of the funds. There is not enough funds to pay all the investors their principal back, and some investors may have already received profits from the enterprise. Often, profits can be taken from investors to compensate for principal lost by other investors. The more challenging issue is determining whether investors and other parties involved in managing the scheme should have done more in preventing the scheme and therefore should lose principal and fees already received. Another issue arises in determining what assets of the individuals orchestrating the scheme may be taken, especially regarding what assets they have given to others like family members may be retrieved. The laws governing these bankruptcy, fraud, and securities matters vary greatly across federal and state laws and involve case-specific inquiries into the relationships and rights involved in the cases.