Charles Ponzi

Introduction

• Large-scale financial scam of Charles Ponzi started imploding in July 1920.
• Panicked investors gathered in front of his Boston office, demanding their money back while the authorities followed his every step.
• His con's specifics were prominently displayed on the front pages of Boston newspapers. Ponzi seemed unconcerned and was as charming as ever.
• He turned to the mass of irate investors while wearing an expensive suit and smiled.
• Ponzi calmed the throng over the course of the next three days by dispersing more than $2 million (about £15 million today).
• He distributed coffee and doughnuts in addition to the cash to reassure investors that they had nothing to be concerned about.
• But the US Attorney for the District of Massachusetts was alerted by Ponzi's obnoxious behavior.
• One of the most infamous and amazing frauds in US history was exposed after an audit of Ponzi's financial records was ordered.

A keen entrepreneur

• Ponzi does not seem to have started out with evil motives, unlike several of his fraudulent successors.
  • The Italian immigrant traveled to Boston in 1903 at the age of 21 with barely $2.50 (equivalent to £48 today).
  • Ponzi had a persistent business drive and a burning desire to become well-known despite his financial situation.
  • He rapidly learned English and took on a tour of the East Coast of America.
  • Following his forgery arrest in Montreal, Canada, in 1909, Charles Ponzi grinned for a police mugshot.
• Charles P. Bianchi was one of Ponzi's numerous identities during the time.
  • He had a variety of temporary occupations, including waiter and interpreter.
  • Ponzi relocated to Montreal in 1907, where he worked at the Bank Zarossi and eventually rose to the position of manager.
  • Early offenses Ponzi felt hopeless when the bank he worked at crashed.
  • He faked a check in the hopes of raising enough money to go back to the US, but was found and sentenced to three years in a depressing jail on the outskirts of Montreal.
  • After being freed, he went back to the US, only to serve two years in a jail in Atlanta for smuggling Italian immigrants into the nation.
• Being a thief quickly became second nature to Ponzi, whether it was because of his surroundings or his temperament.
  • Ponzi went back to Boston after being released.
• In 1918, he wed Rose Maria Gnecco, a stenographer.
  • Ponzi held many different jobs over the course of the next several months, including one for his father-in-law, while always coming up with company concepts.
  • With a new business initiative, a trade journal, he had high hopes for success, but by 1919 it seemed that this endeavor would also fail.
  • Desperation was once again creeping in as he faced being unable to pay his office's rent for the next month.
• Ponzi got a mail from Spain around this time that included an odd paper.
  • The internal reply coupon (IRC), which resembled a self-addressed stamped envelope, seemed to be money but served as a mechanism for paying for foreign postage in advance.
  • It could be redeemed anywhere across the globe, but the set values did not account for certain currencies' severe post-war depreciation.
• Ponzi discovered he could make money by purchasing the coupons in Italy, where they were reasonably priced, and exchanging them for more costly stamps in the US.
  • Ponzi estimated that he could earn a profit of $2.30 (£14 now) for every $1 (£6) that he invested, despite the fact that he had no method for turning the coupons into cash.
• Ponzi received a loan and delivered the money to his family in Italy after seeing the possibilities for a business enterprise.
  • He requested that they buy postal coupons and mail them to him in the US. On some of his sales, he allegedly generated a profit of more than 400%.

Generating investment

• Ponzi bought an asset at a low price and sold it on a different market for a high price, which was not against the law, but he had no clue how to turn the coupons into cash.
  • He was not discouraged, so he told his friends and investors that he could double their money in 90 days.
  • He said with confidence that the great returns on the postal response coupons made it easy to make money.
• Many buyers were paid as promised.
  • Those who put in $1,250 (£7,725) at first got $750 (£4,635) in interest.
  • But these profits weren't made by trading IRCs.
  • Ponzi instead paid back his first investors with cash from new investors, and none of his investors knew how he did it.
• Ponzi started his own business, the Security Exchange Company, to make his scheme look more legitimate.
  • Word quickly spread about the returns he had made, and a small group of early investors quickly grew to include some of Boston's wealthiest people.
  • This growth was fueled by the high rates those early investors were getting.
• It's not clear if Ponzi's scheme was a scam from the start or if he planned to pay the shareholders once he figured out how to turn the coupons into cash, but he made no effort to make real money.
  • He stopped buying IRCs in the end and kept all the money for himself.
• By June 1920, Ponzi had taken money from about 7,800 people for a total of $2.5 million (£19 million).
  • His desk drawers were full of cash, and there was even money in his trash cans.
  • People thought Ponzi was so smart that they mortgaged their residences and put their life savings into his business.
  • Most of them didn't take their profits when they were offered to.
  • Instead, they put them back into the business because they trusted him to make them even richer.
• In February 1920, Ponzi told people who invested that they would get back 50% of their money in 45 days.
  • Soon, that number went up to 100%, which brought in even more money.
• Ponzi put the money in the Hanover Trust Bank in Boston.
  • He also bought a controlling stake in the bank.
  • Ponzi enjoyed his new life of luxury as the money kept coming in.
  • He bought a mansion in Lexington with a heated pool, smoked cigars out of diamond holders, and purchased dozens of canes with gold handles to show off around town.

Questions raised

• Even though Ponzi was earning profit, his business was losing a lot of money because he was using funds from new investors to provide returns to people who had invested before.
  • This kind of scheme, which "borrows from Peter to pay Paul," was eventually named after Charles Ponzi.
• By the middle of 1920, Ponzi was starting to make about $250,000 (£1.9 million) per day, but when a furniture dealer said in public that Ponzi's checks had bounced, local newspapers started to look into it.
  • The Boston Post answered with a series of articles that asked tough questions about Ponzi's money machine and pointed out that he didn't invest in his own company.
• The Commonwealth of Massachusetts got involved around the same time.
  • Ponzi was doubted by state officials, but he kept them from looking at his books.
  • His helpful offer that he wouldn't take any new investments while they looked into him calmed their fears.
  • When the US Attorney for Massachusetts looked at the books, all he found was a box of index cards with the names of the investors.
• In July, Ponzi got another blow when the US Post Office confirmed that he couldn't make the returns he said he could on the international postal vouchers because there weren't enough of them in circulation.
  • The Post also wrote about this, so Ponzi sued the newspaper and made up a story about buying coupons in Italy and selling and reselling them all over Europe. He didn't persuade anyone.
• On August 2, 1920, newspapers said that Ponzi was bankrupt.
  • As investors pulled out, Ponzi had a hard time finding the money to pay them back.
• On August 9, his primary bank account was overdrawn, so the district attorney froze it.
  • Ponzi turned himself in to federal officials on August 12, 1920, because he knew he was about to be arrested.
  • He was accused of 86 different kinds of mail fraud.

Final years

• Ponzi had caused investors to lose about $20 million (£150 million).
• Ponzi paid some people, but he was still quick by $7 million (£53 million).
• Six big state banks, including the Hanover Trust, failed because of his arrest.
• Many investors' finances were ruined because they got less than 30 cents for every dollar they were loaned.
• The impulsive Ponzi used the money from his bail to run away to Florida.
• There, he started the "Charpon Land Syndicate," another Ponzi scheme that sold swampland to investors and promised them big returns on their money.
• Ponzi was arrested for deception and given a one-year prison sentence, but he was released after an appeal.
• He was caught in New Orleans trying to escape by boat to Italy, even though he had shaved his head and grown a moustache to hide himself.
• He was sent back to Boston to finish his original jail sentence.
• He was sent back to Italy in 1934, where he tried a few more schemes that didn't work.
• After that, he moved to Brazil, where he died in 1948.

How Ponzi schemes impact the economy

• Ponzi schemes hurt investors' finances and the economy as a whole because they take money away from constructive and legal investments.
• The more damage a scam does, the bigger it is.
• This is especially true when big banks are involved.
• When the plan is exposed, investors may lose faith in those institutions and be less likely to put money into them again. It can be hard to find and shut down Ponzi schemes.
• Most of the time, neither the people who do bad things nor the schemes themselves are controlled.
• Even in places that are regulated, Fraudsters may use technical terms to hide what they are really about.
• When Ponzi schemes break more than one financial law, they may be looked into by more than one regulator. This makes it hard to see the big picture.
• Regulators may not look into the scheme because they think the institutions that invested in it are too big to fail.

Related Crimes

• 1899: William "520 Percent" Miller runs a ponzi scheme in New York. He scams shareholders out of $1 million (£19 million today) by telling them they will get 10% interest every week on their money.
• 1910: A man named Lucien Rivier opens a bank in Paris and cheats 6,000 investors out of about 2 million francs (£6.5 million today).
• 2010: Tom Petters' $3.65 billion (£2.5 billion) scheme falls apart because an employee blows the whistle.
• 1991–2009: Allen Stanford of Texas runs a 20-year plan that costs $7 billion (£5 billion) through his bank in Antigua.