Charles Ponzi: Natural Born Swindler Charles Ponzi allegedly once said “I went
looking for trouble, and I found it.” Truer words were never spoken. From an early
age, Ponzi discovered that hard work and book learning were not for him. He was always involved
in one scheme after another, hoping that some day, he will find the one that would make
him rich beyond his wildest dreams. He turned out to be right. One day, Charles
Ponzi was struck by a lightning bolt of perfidious inspiration and set in motion one of the most
brazen and ambitious cons in history. The basic concept behind the swindle even took
his name. Sure, people like Lou Pearlman and Bernie Madoff employed the fraud to far greater
success and, as we will find out, he wasn’t even the first to do it, but, even today,
the con is remembered as the Ponzi scheme. The con man lured his victims with the simple,
but irresistible promise of quick and easy money. But this was one temptation that Ponzi
himself could not control. He kept on scheming and plotting even when his walls of lies were
crashing down around him and the end was inevitable. Ultimately, his deceitful ways cost him everything
– his money, his wife, his friends, his freedom and he ended up dying penniless in a charity
hospital in Brazil. Today we look at Charles Ponzi, the con man
who experienced the highest of highs followed by lowest of lows.
Early Life Charles Ponzi was born Carlo Pietro Giovanni
Guglielmo Tebaldo Ponzi on March 3, 1882, in the town of Lugo in northern Italy. His
parents were Oreste and Imelda Ponzi. A lot of the information on Ponzi’s early
years comes from the man himself from interviews he gave after he became a national celebrity,
as well as his boastful autobiography. As you might imagine, there is an inherent risk
when you take a con man at his word, but we have little choice here. According to Ponzi,
his family was once well-off and lived in Parma, but had fallen on hard times prior
to his birth. At one point, he relocated to Rome and took on odd jobs before being accepted
to the Sapienza University of Rome. By his own admission, Ponzi was not exactly
a conscientious student. Instead, he preferred to hang around bars and cafes with his rich
friends. As he put it, “spending money seemed the most attractive thing on earth.”
Unsurprisingly, the good times did not last long and, after a few years, Ponzi was forced
to leave the university with no money and no diploma. He heard stories of other Italians
who went off to America to find fame and fortune and decided that this was the only course
left open for him. Coming to America
On November 15, 1903, Charles Ponzi arrived in Boston Harbor aboard the SS Vancouver.
Again, going by his account, he only had $2.50 in his pockets because he lost the rest of
his money playing cards during the transatlantic crossing. However, he had “$1 million in
hopes.” Even so, his climb towards the top was long
and slow, and it started with a bunch of odd jobs up and down the East Coast. He worked
as a busboy, a waiter, a sign painter, but never lasted in one position long because
he always got in trouble for stealing or trying to cheat customers.
After a few years of this, Ponzi moved to Canada and settled in Montreal. In 1907, he
found a job as an assistant teller with Zarossi Bank, a new business opened to cater to the
recent influx of Italian immigrants. Here, Ponzi managed to rise through the ranks quickly
because he was charming and outgoing and could speak multiple languages. He might have been
able to launch a successful career as a banker, if not for the fact that the owner of the
bank, Luigi Zarossi, was operating his own scam. He attracted new clients with generous
interest rates on bank deposits, except that he was paying on those interests using the
money deposited into new accounts. Meanwhile, he used the profits for real estate loans.
Eventually, the scheme failed and Zarossi fled to Mexico. Ponzi was, once again, penniless.
He forged a check for $423.58 and got caught. He ended up serving three years in St. Vincent-de-Paul
Federal Penitentiary in Montreal before returning to the United States.
Back in Boston, it did not take long for Ponzi to get involved in another criminal endeavor.
This time, it was smuggling Italian immigrants across the border. He was caught again and
spent another two years in prison. After becoming a free man again, it seems
that Ponzi tried to walk the straight and narrow, at least for a little while. Perhaps
part of the reason was Rose Gnecco, a young woman he met on the streetcar one day and
fell in love with. Ponzi wooed her endlessly and, soon enough, the innocent girl was enamored
with his charm and apparent sophistication. The two married in 1918.
During that time, Ponzi first worked as a teller for broker J. R. Poole, and afterwards
left to take over his father-in-law’s grocery store. Neither endeavor proved successful
and, soon enough, Charles Ponzi was looking for a new get-rich-quick-scheme.
The Ponzi Scheme Even if you never heard of Charles Ponzi before
this video, chances are that you were still familiar with the scam that shares his name
– the Ponzi scheme. But what exactly does it involve?
A Ponzi scheme is an investment fraud that relies on the old adage “rob Peter to pay
Paul.” The basics of the con involve paying off the “dividends” of older investors
with money from new investors. The people think their money gets invested
wisely in profitable business ventures and that the person in charge is just really good
at their job. Most of the funds, however, go straight into the pocket of the schemer.
In exchange, the victims get some money back which, in their minds, represents the profits
they made from legitimate transactions. As far as they are concerned, the bulk of their
investment is still safe and sound, not realizing that it is already gone, used to pay off other
investors and to finance a luxurious lifestyle for the con artist.
The biggest drawback of the Ponzi scheme is that it requires a constant flow of new investors
to pay off the earlier ones. If the well runs dry, the scam falls apart. That is why these
swindlers do their best to ensure a steady supply of new funds by promising huge profits
with no risks. This turns the scam into a bit of a vicious circle: the more “profits”
the con men pay out, the more new investors they need which, in turn, raises the amount
of “profits” being paid out, which results in the need for new investors and so on.
Once a Ponzi scheme is set in motion, it doesn’t really stop until it crashes and burns and
the fraud is exposed. Even so, a skillful con man can keep it going for years, even
decades. There is usually no shortage of people unable to resist the allure of fast and easy
money. The Ponzi scheme gets generally mixed up with
the pyramid scheme and, although the two are very similar, there are a few key differences.
Most importantly, in a Ponzi scheme, the fraudster acts as sole operator and interacts with all
his targets directly. In a pyramid scheme, however, participants need to recruit others
into the fray in order to gain any benefits, thus creating a layer of separation between
them and the original fraudster each time. Moreover, a Ponzi scheme promises the victims
profits through obscure methods of investment, while pyramid scheme participants know from
the outset that their returns come from signing up new members. Generally, a Ponzi scheme
is more durable because it requires fewer people to stay afloat. Although Charles Ponzi’s name is inexorably
attached to this type of con, he was not the first to employ it. A former German actress
named Adele Spitzeder might lay claim to that title after opening a bank in 1871 and using
this method to pay off her investors. Her scam only lasted a little over a year, but
was soon followed by Austrian Johann Baptist Placht whose fraud was discovered in 1874.
In America, Sarah Howe might be the first to employ this technique. In 1879, she opened
a bank named the Ladies’ Deposit Company in Boston which offered large interest rates
on deposits. She claimed to have backing from a Quaker charity, but was simply using money
from new depositors to pay off the interest rates. Another notable swindler was William
“520 percent” Miller who operated the Franklin Syndicate. He defrauded $1 million
in 1890s money before being caught. There are some red flags which the United
States Securities and Exchange Commission or SEC say can help investors avoid Ponzi
schemes. They include the promise of unreasonably high returns with no risk, consistent returns
regardless of the state of the market, shady paperwork, unlicensed sellers, and secretive
or complex investment strategies. If it sounds too good to be true, it probably is.
How the Scam Worked
Now we have a general idea of what a Ponzi scheme is, but how exactly did Charles Ponzi’s
specific scam work? It was based around a special postal coupon known as an International
reply coupon or IRC. Introduced in 1906, it was meant to be exchanged for the postage
stamp necessary to send one single-rate, ordinary delivery between two countries which were
members of the Universal Postal Union (UNU). In other words, a person from the United States,
let’s call him Jack, sent a letter to Marie in France. He wanted a reply, but was not
expecting Marie to spend her own money on postage stamps to write him back. Therefore,
he also included with the original letter an IRC which he bought in the U.S. which Marie
could redeem in her own country for the postage necessary to send back another letter.
Ponzi had never heard of these coupons until he received one from a company in Spain. He
had written many letters to businesses in Europe presenting various ideas of his and
this company wrote him back and included an IRC for his reply. Whatever money-making pitch
Ponzi originally made to the Spanish company was quickly forgotten as he came up with a
new idea. Ponzi realized that inflation, mainly caused
by World War I, meant there was a slight, but noticeable difference in the value of
the stamps which were exchanged using IRCs. The redemption rate of these coupons was fixed
through an international treaty, but one could, theoretically, make a profit if they bought
IRCs in a different country using currency that had fallen against the dollar, then exchanging
them for stamps in the United States and then selling those stamps in U.S. currency.
Ponzi could, for example, buy an IRC in a Spanish post office worth 30 centavos. He
could then exchange it in the U.S. for a stamp worth 5 cents and make a 10 percent profit.
If he scaled up this operation, he could earn substantial dividends. The profit would be
even greater if he bought IRCs from countries with the highest inflation.
The Securities Exchange Company Basically, what Ponzi wanted was a type of
arbitrage, which simply means purchasing something in one market and then selling it in another
market where the price is higher. This was not only common and profitable, but also perfectly
legal. Ponzi had his sales pitch and now he needed
people willing to invest. He made bold claims of having agents all over Europe who were
buying up IRCs in bulk and sending them back to him so he could exchange and sell them
for a profit. He boasted that he could provide returns on investment of 50 percent in 45
days or 100 percent in 90 days. Any request for additional details would have been denied
on the basis that it could help the competition. In reality, setting up such an operation would
have been so costly that it would have completely negated any profits made from selling IRCs.
Not to mention the fact that there were nowhere near enough postal coupons in the world to
sustain a business the size that Ponzi’s would reach. But these weren’t details that
needed concern his clients. At first, Ponzi tried the banks, but they
were not biting and refused to grant him loans for this new business. However, he found considerably
more success simply appealing to the general population who proved more inclined to believe
his tales of easy riches. At first, he mainly appealed to friends and acquaintances. Like
his biographer Donald Dunn argued, Ponzi’s biggest talent had nothing to do with being
good with finances, but being good with people. He made sure not to be too aggressive with
his pitches. He casually flaunted his success and only went into detail when pressed by
others. Then, if they absolutely insisted, he would take their money. In January 1920, Ponzi started the Securities
Exchange Company. By then, the money had begun rolling in and the swindler had a supply of
investors. Launching his own business was the natural next step, as well as a necessary
move in order to attract new clients and keep delivering those promised returns. Soon enough,
he relocated to a bigger office on Boston’s School Street, the site of the first public
school in the United States. Let the Good Times Roll
It wasn’t long before Ponzi was handling millions of dollars from tens of thousands
of investors. People were lining up around the block to give their money to this financial
wizard who came out of nowhere and had the secret to untold wealth. At the height of
his success, Ponzi was making around $250,000 a day. Obviously, this newfound success allowed him
to indulge in a lavish lifestyle. He bought a spacious 12-room mansion in Lexington, Massachusetts.
He rode around town in a custom-built chauffeured limousine, wearing expensive tailored suits
with diamond tie pins and carrying around a gold-handled cane. Some of his more outlandish
expenditures included buying a bank which previously rejected his loan application,
as well as Poole’s brokerage firm where he used to work just so he could fire his
former boss. The good times lasted less than a year for
Ponzi before he got caught and, looking back, it is surprising that it even took that long.
He might have been an incredible salesman, but Ponzi was not a skilled financier like
Bernie Madoff, for example, who could keep his scam going for decades. In fact, Ponzi’s
own publicist later called him a “financial idiot” who couldn’t add.
His scheme did not stand up to scrutiny from a person who knew what they were talking about.
However, Ponzi managed to delay investigations, first by successfully suing a financial writer
for libel which acted as a deterrent to other journalists, and then by sweet talking state
officials and easing their growing suspicions. Ponzi’s world came tumbling down in the
summer of 1920, mostly courtesy of the Boston Post which even won the Pulitzer Prize for
Public Service for their exposure of Ponzi’s operations. However, credit is also due to
William McMasters, the man Ponzi hired as his publicist shortly before his downfall.
Exposed At first, the relationship between the three
started off great. One of McMasters’ first acts as Ponzi’s publicist was to schedule
him an interview with the Boston Post which, at the time, had the largest circulation in
New England. On July 24, a piece on Ponzi appeared on the newspaper’s front page.
It detailed his rags-to-riches story and how he was able to provide all of his investors
with amazing returns that no other financier could come close to. On July 26, a Monday,
Ponzi went to his office to find a massive line of people waiting to give him their money.
In just that one day, Ponzi collected over $3 million which is over $34 million in modern
currency. This huge success came with drawbacks as it
made Ponzi front-page news all over the country. The Boston Post, in particular, now had a
strong interest in him. Concurrently, McMasters began doubting his client’s claims, realizing
that it would have been impossible for anyone to deliver the type of returns that Ponzi
promised. Eventually, McMasters became convinced that
his client was a fraud and began working with the Post to expose him. The newspaper’s
acting publisher, Richard Grozier, was initially wary of the idea because he feared a lawsuit,
but McMasters got him onboard with the help of district attorney Nathan Tufts who promised
him immunity from lawsuits if the exposé proved false. On August 2, the Boston Post ran a first-person
account written by McMasters which had the headline “Declares Ponzi Is Now Hopelessly
Insolvent.” The publicist proclaimed that Ponzi was at least $2 million in debt and
up to $4.5 million if you took into account the interest on his outstanding notes.
The downfall came quick for Ponzi. He tried reassuring his investors and lashing out at
his accusers, but there was no way for him to stop government auditors from looking at
his books. On August 11, the Post further hurried his demise by revealing that Ponzi
spent time in prison in Canada for forging checks. An official report from the U.S. Post
Office revealed that Ponzi nevered cashed in any IRCs in the United States, while an
audit concluded that he was $3 million (later revised to $7 million) in debt.
Charles Ponzi was arrested on federal charges of mail fraud. His downfall led to the collapse
of six banks and caused the financial ruin of tens of thousands of people who received
less than 30 cents on the dollar on their investments.
The Scams Continue Initially, Ponzi only served three-and-a-half
years in prison before being released on parole. However, he was immediately arrested again
on state charges of larceny and sentenced to another seven to nine years in prison.
Ponzi appealed the state conviction and was released on bail until the matter was settled.
He immediately fled Massachusetts and ended up in Jacksonville, Florida. Despite the complete
collapse of his financial house of cards, Ponzi had no intention of turning straight.
As he said in his autobiography, “no man is ever licked, unless he wants to be. And
I didn’t intend to stay licked.” He immediately got started on another scam
which meant to take advantage of the real estate boom in Florida. He founded the Charpon
Land Syndicate and sold property to oblivious investors who were lured in by Ponzi’s charm
and his promises of huge returns on valuable tracts of land in just a few months. What
they soon discovered was that they actually purchased worthless swampland and property
that was underwater. Ponzi was arrested again. However, before
the authorities fully realized who they were dealing with, he posted bail and went on the
run once more. This was one too many close calls for the con man and he decided to escape
to Italy. He shaved his head and mustache and secured passage as a crewman aboard a
merchant ship headed for Europe. However, his identity was discovered and Ponzi was
arrested in the port of New Orleans. Final Years
This time, there was no more escaping for the supreme swindler. He served seven years
in prison, was released in 1934 and then deported to Italy because Ponzi never actually obtained
his American citizenship. The final years of his life are not well-documented
because they were not covered in his autobiography and, also, because the world had lost interest
in Charles Ponzi by then. The man who left prison was not the same as the one who entered
it. Ponzi had lost his youth, his confidence, and his guile. His wife did not follow him
to Italy and divorced him a few years later. Ponzi didn’t last long in his motherland
and ended up in Brazil. According to one version of events, this was because he got caught
conning people again, and had to go on the run. Another version said that a cousin of
his who worked in the air force got him a job with an airline that ran flights between
Italy and Brazil. The gig only lasted for a few years, though, as the fledgling airline
was closed when Brazil sided with the Allies during World War II.
Charles Ponzi spent the last few years of his life in squalor, working as a teacher
and translator to make ends meet. A stroke left him partially blind and paralyzed. He
died in January 18, 1949, in a charity hospital in Rio de Janeiro, barely leaving behind the
money needed to cover his burial.