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Who was "Ponzi"?
Charles Ponzi (March 3, 1882 – January 18, 1949) was an Italian immigrant to the United States who became one of the
greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.
The term "Ponzi scheme" is a widely known description of any scam that relies on a "pyramid of investors" who contribute money to a fraudulent program. Charles Ponzi had promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeem them at face value in the United States as a form of arbitrage.
The Man
On November 15, 1903 the 21 year old arrived aboard the S.S. Vancouver in Boston after flunking out of school at the University of Rome. By his own account, Ponzi arrived in the United States with just two dollars and fifty cents in his pocket, having gambled away the rest of his life savings during the voyage. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," he later told the New York Times.
He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.
For the next 14 years, Ponzi roamed throughout the U.S. and Canada, seeking fortune and adventure but more often finding poverty and misadventure. Clever and charismatic, at various times he was a hero - saving the life of a young nurse by literally giving her the skin off his back for primitive, but successful, skin grafts - and a criminal, serving time for passing a bad check and for helping fellow Italians to sneak into the U.S. from Canada.
When he returned to Boston in 1917, Ponzi was still seeking his big break. First, though, he fell in love with a beautiful woman named Rose Gnecco. All she wanted was a little house filled with children, but Ponzi wanted her draped in diamonds and furs.
The Ponzi Scheme
He tried and failed at several businesses. Then, then in late 1919, he opened a letter from an acquaintance in Spain. Pinned to the corner of the letter was an International Reply Coupon (IRC), an obscure little document that could be used to purchase a postage stamp at a fixed price in 63 countries that were members of the Universal Postal Union.
The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after the World War-I had greatly decreased the cost of postage in Italy as exchanged in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps to a higher value.
For example, a person could buy 66 International Reply Coupons in Rome for the equivalent of $1. Those same 66 coupons would cost $3.30 in Boston. If he could buy coupons in Rome and trade them in Boston, Ponzi could earn 230% profit, before expenses, on every $1.
The process was: send money abroad; have IRCs purchased by agents; send the IRCs to the U.S.A.; redeem the IRCs for stamps to a higher value; sell the stamps. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which was not illegal.
Ponzi canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the "Securities Exchange Company", the day after Christmas in 1919 to promote the scheme.
Unbelievable Profits
"A huge line of investors, four abreast, stretched from the City Hall Annex . . . all the way to my office! . . . Hope and greed could be read in everybody's countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, was reflected in everybody's eyes! . . .To the crowd there assembled, I was the realization of their dreams . . . The 'wizard' who could turn a pauper into a millionaire overnight!" -Ponzi
Some people invested, and were paid off as promised. The word spread, and investment came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US/$5,000, (approximately US/$54,000 in 2008 dollars).
By March he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time investors were being paid impressive rates, encouraging yet others to invest.
By May 1920 he had made $420,000 ($4.59 Million in 2008 terms). He began depositing the money in the Hanover Trust
Bank of Boston (a small Italian American bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president. He did, in fact, buy a controlling interest in the bank. One biographer of Ponzi who wrote eighty years later described the cash price at which the bank's founding family sold their stake as "suspiciously high". Having had a fiduciary duty to protect their depositors they were a lasting un-indicted beneficiary without direct involvement.
By July 1920 Ponzi had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested back into the scheme.
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only source Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.
Ponzi lived luxuriously with his incredible profits, buying a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool. He also brought his mother to the United States from Italy in a first-class stateroom on an ocean liner.
The Beginning of the End
Despite his success, there were signs growing of Ponzi's eventual downfall. A furniture dealer, who had given Ponzi $200 worth of furniture when he could not afford to pay for it earlier, sued Ponzi in an attempt to collect the money. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time.
There was then a rush by some investors on the Securities Exchange Company to pull out their money. Ponzi paid them and the concerns were tamed. In fact, on July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making an estimated $250,000 a day!
Despite the positive article, one of the editors of the Post was suspicious and assigned investigative reporters to check Ponzi out. He was also under investigation by the Commonwealth of Massachusetts, and on the day the Post printed its article Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation; a fortunate choice, as proper records were not being kept. Ponzi's offer temporarily calmed the suspicions of the state officials.
By this time Ponzi was seeking another deal to get him out of the golden trap he had built for himself, but time was running
out. On July 26 the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron's financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself wasn't investing with his own company.
Barron then noted that to cover the investments made with the Securities Exchange Company, 160,000,000 postal reply coupons would have to be in circulation. However, only about 27,000 coupons were actually circulating. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.
The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him.
In the short term, Ponzi had hired a publicity agent, James McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He went to the Post, calling Ponzi a "financial idiot." The paper offered him five thousand dollars for his story, and ran a headline on August 2 declaring Ponzi hopelessly insolvent.
On August 10 federal agents raided the Securities Exchange Company and shut it down. There was no large stock of postal reply coupons. (Fifty-three-thousand coupons would have been necessary just to satisfy the first 18 investors). The Hanover Trust Bank was shut down as well.
Placed Under Arrest
On August 12, 1920 Ponzi was under arrest, with a Federal indictment. His liabilities were estimated at $7,000,000.
Ponzi's supporters were outraged at the officers who arrested him. 17,000 people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.
On November 1, 1920, Ponzi pleaded guilty to mail fraud, and was sentenced to five years in federal prison. He was released after three and a half years to face state charges. On November 29, 1924 proceedings were initiated to have him deported.
Real Estate Scam
During a state trial he was again found guilty and sentenced to seven to nine years. Before entering state prison, Ponzi jumped bail and fled to Florida, where he set up a real estate business in the Springfield section of Jacksonville. In September, 1925 Charpon Land Syndicate began selling "prime Florida property" to gullible investors. In reality, it was a scam that sold swampland in Columbia County.
Ponzi was indicted by a Duval County grand jury in February, 1926 and charged with violating Florida trust and securities laws. A jury found him guilty and the judge sentenced him to a year in the Florida State Prison. Ponzi appealed his conviction and was freed after posting a $1,500 bond. Ponzi traveled to Tampa where he shaved his head, grew a mustache, and tried to flee the country as a crewman on a merchant ship bound for Italy. However, the ship made one last American port call and he was caught in New Orleans and sent back to Massachusetts to serve out his prison term. Released in 1924 and now faced with further charges, he was again imprisoned, this time for 8-9 years.
During these years, government investigators tried to trace Ponzi's convoluted accounts to figure out how much money he had taken and where it had gone. They never managed to untangle it and could only conclude that millions of U.S Dollars had gone through his hands.
Carlo (Charles) Ponzi's Last Chapter
Out again in 1934, Carlo was deported to Italy, where, sizing up a sucker if he ever saw one, he quickly offered his services to Mussolini. Once hired, Carlo dispelled any confidence in his claim to be any sort of financial wizard and was soon fired. In a final chapter of bad luck, Carlo hooked up with an Italian airline and was sent on a trip to Rio de Janeiro, Brazil. Carlo had no sooner arrived to take up his new duties when the airline abruptly went out of business, stranding him there.
Never again leaving Rio, Carlo Ponzi would end his days penniless, nearly blind, and partially paralyzed. He died in a charity ward in Brazil in 1949.