Charles Ponzi

From Academic Kids

Charles Ponzi (1882January 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, and Carlo.

Most people have never heard of Ponzi, but the term "Ponzi scheme" is fairly well known, and even those who haven't heard of that know about its modern version, the "make money fast" schemes that percolate through the Internet.

Contents

Early life

Parts of Charles Ponzi's life are hard to determine for certain, as Ponzi himself was an incurable liar. He was born Carlo Ponzi in Parma, Italy, in 1882, and emigrated to the United States in 1903. He would later claim that he had been a student at a university in Italy and decided to emigrate when he ran out of money, but other accounts suggest he was an inept petty thief who always got caught, and his family finally decided to get rid of him by shipping him across the Atlantic.

Arrives in the United States

Whatever the true details of Ponzi's early life, the short fellow, only about 158 centimeters (5 feet 2 inches) tall, but with boundless self-confidence, had a big smile and a fast line of talk.

There was a huge discrepancy, however, between Ponzi's grand opinion of himself and his actual talents. He arrived in the US almost penniless, having been cleaned out in card games during the voyage across the ocean.

He was undiscouraged. He learned how to speak and read English, and got a job as a dishwasher in a restaurant. He slept on the floor of the restaurant as he had no other place to live, but managed to work his way up to the position of waiter. Unfortunately, he shortchanged the customers and played games with the bills, and so he was fired.

Ponzi was unfazed. In 1907, he moved to Montreal, Canada, and became an assistant teller in a bank. Among his talents was a certain gift for numbers, and he found out that the bank was in serious financial troubles because of bad real estate loans. He schemed to take over the bank, but was caught forging checks in the name of an elderly woman who had a deposit at the bank. This exercise got him three years in a Canadian prison.

He wrote his mother that he had found a job as a "special assistant" to a prison warden. When he was released in 1911, he decided to return to the United States, but got involved in a scheme to smuggle Italian immigrants across the border. He was caught and spent two years in an Atlanta prison.

The Ponzi Scheme

When Ponzi was released he went to Boston, Massachusetts. There he met and in 1918 married a pretty, wide-eyed Italian girl, Rose Gnecco, who was swept off her feet by Ponzi's charm. Some accounts claim that Ponzi was working at different jobs and bumbling them, others that he was actually finding success with J.P. Poole, an import company. In either case, he finally had a vision.

The vision was the "postal reply coupon". Early in the 20th century, the United States had many immigrants who wanted to keep in touch with their families in the old countries. However, many of these families were terribly poor, as Europe was in desperate shape following the First World War. Very often the families were hard-pressed to afford postage.

The postal reply coupon was a chit that the American son or daughter could include with the letter, which could be redeemed at the local post office for enough postage to allow the family to mail a letter back to the US. The scheme was devised by an international postal congress in 1907 and persists today as an international reply coupon.

In November 1919, Ponzi realized that, on paper at least, international trading of postal reply coupons could yield 400% returns. Essentially, he was considering a form of "arbitrage", or currency trading, in itself, legal.

Ponzi began to canvass his friends and associates to get backing for his scheme. He offered them a 50% return on their money in 45 days, or a doubling of their money in 90 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, to promote the scheme.

Ponzi's sales pitch was smooth and low-key. He managed to get a few investors, and paid them off as he had promised. The word spread, and investors began to come in the door at an increasing rate. He hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was $5,000 USD, a tidy sum for the time. That was just the beginning.

By March, he was up to $30,000 USD. A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. If investors were doubtful, he would overwhelm them with his line of talk. By throwing his impressive pay-off rates at people, he could often persuade would-be investors.

By May 1920, he was up to $420,000 USD. He began depositing the money in the Hanover Trust Bank, in hopes that once his account was large enough he could impose his will on the bank or even be made its president. He in fact managed to get a controlling interest in the bank.

By July 1920, he was up to millions. Widows were mortgaging their homes, people were taking their life savings to invest with the clever Ponzi. Most did not collect their interest, but reinvested.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis showed that he wasn't making money, he was losing it rapidly. For every dollar he took in, he went more deeply into debt. As long as money kept flowing in, Ponzi would stay ahead of the eventual collapse.

Ponzi lived luxuriously: He bought a mansion with air conditioning and a heated swimming pool, and brought his mother from Italy in a first-class stateroom on an ocean liner. He was a hero among the Italian community, and was cheered wherever he went.

Suspicion

There were signs of Ponzi's eventual ruin: A furniture dealer who had given Ponzi furniture when the little Italian was broke tried to sue Ponzi to cash in on the gold rush. It was a nuisance lawsuit and went nowhere, but it did start people asking how Ponzi could have gone from being broke to being a millionaire in so short a time. There was a run on the Securities Exchange Company as some investors decided to pull out.

Ponzi paid them cheerfully and the run stopped. In fact, on July 24, 1920, the Boston Post printed a positive article on Ponzi and his scheme that sent investors into the offices of the Securities Exchange Company at a faster rate than ever. At that time, Ponzi was pulling in a quarter of a million dollars a day.

Despite this reprieve, one of the editors of the Post was suspicious and assigned investigative reporters to check out Ponzi. He was also under investigation by the state of Massachusetts, and on the same day the Post article was printed, Ponzi met with state officials. He managed to divert the officals from checking his books by offering to stop taking money during the investigation. This was a fortunate choice, as Ponzi wasn't keeping any worthwhile records of his finances. Ponzi's actions, however, temporarily calmed the suspicions of the state officials.

Collapse

By this time, Ponzi was casting about for another deal to get him out of the golden trap he was building 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. If this was such a good deal, why didn't Ponzi take advantage of it himself?

Barron then noted that to cover the investments made with the Securities Exchange Company, there would have to be about 160,000,000 postal reply coupons in circulation. There were only about 27,000. The United States Postal Service added that nobody was buying postal reply coupons in quantity at home or abroad. On paper, there were fantastic profits in trading postal reply coupons, but they were a penny item. The overhead required to handle the trades would have eaten up the profits quickly.

The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million USD 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.

There was something clueless in Ponzi's cleverness. He had set a scheme in motion that was sure to collapse sooner or later. He was pulling in a pile of cash, but only at the expense of going into even greater debt. At some point, the sensible thing to do would be to take the money and run to someplace where the law couldn't get at him.

Instead, he stayed with it. The only reason that makes any sense is that he thought he could use the fortune he was accumulating to come up with a new scheme that would save him. He could figure out some way of diverting the fortune and the debt into a legitimate line of business, or maybe he could just hire lawyers and judges and buy his way out of trouble.

On August 2, the Boston Post ran a headline story that declared Ponzi was hopelessly insolvent, and cited Ponzi's own publicity agent, James McMasters, who was too honest to go along with the crooked scheme. On 10 August, Federal agents raided the Securities Exchange Company and shut Ponzi down. No large stock of postal reply coupons was found, and never would be. The Hanover Trust Bank would be shut down presently as well.

The Post continued their articles, with one revealing Ponzi's jail record and publishing his (smiling) Canadian mug shots. By 13 August, Ponzi was under arrest, with a Federal indictment citing 86 counts of fraud. Ponzi's fans 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.

Prison and later life

On November 1, 1920, Ponzi pleaded guilty to postal fraud, and was sentenced to five years in Federal prison. He was released after three and a half years to face state charges. He was found guilty again and sentenced to nine years. He jumped bail and fled to Florida, where he set up a scam to sell "prime Florida property" to gullible investors.

Florida authorities got wise to Ponzi quickly. He fled to Texas, where he shaved his head, grew a mustache, and tried to flee the country as a crewman on a merchant ship. He was caught and sent back to Massachusetts to serve out his prison term.

In the meantime, government investigators tried to trace through Ponzi's convoluted accounts to figure out how much money he had taken in and where it had gone. They never did manage to untangle it, and could only conclude that millions had gone through his hands.

Ponzi was released in 1934. The flashy cockiness that had kept him afloat had faded by that time, and when he left the prison gates he was met by an angry crowd. Furthermore, he had never become an American citizen, and so the US government deported him back to Italy immediately. He told reporters before he left: "I went looking for trouble, and I found it." Rose stayed behind. She would divorce him presently.

In Italy, Ponzi jumped from scheme to scheme but little came of them. He eventually got a cozy job as the agent for the Italian state airline in Brazil, but during World War II, the Brazilians, who had signed up with the Allies, realized the Italians were using the airline to ship strategic materials and shut it down.

Charles Ponzi spent the last years of his life in poverty. He had a stroke in 1948, and died in a charity hospital in Rio de Janeiro on January 18, 1949. His life had been characterized by one great moment of glory surrounded by failures. Ponzi commented about the wild ride he had given Bostonians: "Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over!"

Although pyramid schemes were nothing new when Ponzi discovered postal reply coupons, his scam was indeed one of the great shows in the history of fraud. He would have also been gratified to know that from that time on, the old game of borrowing from Peter to pay Paul on a massive scale would be known as a Ponzi scheme.

Reference

The initial version of this article was based on a public domain article from Greg Goebel's Vectorsite.

  • Dunn, Donald (1975) Ponzi: The Incredible True Story of the King of Financial Cons, McGraw-Hill; also Broadway Books, 2004
  • Ponzi, Charles (1937) The Rise of Mr. Ponzi, a hand-typed autobiography available at the Library of Congress
  • Hurwitz, Albert (1970) "The Ponzi Bubble", Herald Magazine (Boston Sunday Herald), August 30, 1970
  • Reese, A. (1920) "New and Old South Sea Bubbles", World's Work, November 1920

External Links

[Contains useful Freedom of Information Documents (http://www.mark-knutson.com/)]

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