Reuters: Securities and futures regulators charged a Philadelphia-area fund manager with operating a US$50-million Ponzi scheme, where he paid off earlier investors with money from later investors, officials said yesterday. The Securities and Exchange Commission, which has been criticized for not uncovering Wall Street financier Bernard Madoff's alleged US$50-billion fraud, said it obtained an emergency court order freezing Joseph Forte's assets. The SEC and the Commodity Futures Trading Commission allege that Mr. Forte told investors that he would invest funds in an account that would trade in securities and futures contracts, including S&P 500 stock index futures and metals futures. Mr. Forte reported consistent returns to his investors even though he consistently lost money, withdrew millions of dollars in fees for personal use and used investor funds to repay other investors, the regulators said. According to the government complaints, Mr. Forte conducted the Ponzi scheme since at least 1995 and he solicited about US$50-million.
In college, I was working for a wealthy real estate investor in Chicago who was running a commercial real estate syndication. The guy basically guaranteed new investors a 9% IRR per year, which everyone knew was unrealistic. When asked how he was planning on paying these unrealistic returns, he said "with the money raised from new investors". I quit soon after. I'm afraid this is much more common than many people think.