A Ponzi scheme is a type of investment fraud that lures investors by promising high rates of return with little to no risk. The scheme generates returns for older investors by acquiring new investors, who are promised a large profit at little to no risk. The fraudulent investment scheme is premised on using new investors funds to pay the earlier backers. Companies that engage in a Ponzi scheme focus their energy into attracting new clients to make investments, otherwise their scheme will become illiquid. The basic premise of a Ponzi scheme is "to rob Peter to pay Paul". Initially, the operator pays high returns to attract investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The schemer pays a "return" to initial investors from the investments of new participants, rather than from genuine profits. Ponzi schemes sometimes begin as legitimate investment vehicles, such as hedge funds that can easily degenerate into a Ponzi-type scheme if they unexpectedly lose money or fail to legitimately earn the returns expected. The operators fabricate false returns or produce fraudulent audit reports instead of admitting their failure to meet expectations, and the operation is then considered a Ponzi scheme. Ponzi schemes are named after Charles Ponzi, a businessman who successfully persuaded tens of thousands of clients to invest their funds with him in the 1920s. Ponzis scheme promised a specific amount of profit after a specific amount of time through the purchase and sale of discounted postal reply coupons. Instead, he was using new money invested to pay off old obligations. Ponzi schemes inevitably inflict financial damage on most of their investors and divert savings from productive investment. If left unchecked, they can grow exponentially and cause broader economic and institutional damage as well, undermining confidence in financial institutions and regulatory authorities and creating fiscal costs if bailouts occur. They can even lead to political and social instability when they collapse.