Charles Ponzi PDF Print E-mail
Friday, 13 March 2009 16:14

Charles Ponzi

Born: March 3, 1882 Lugo, Italy

Died: January 18, 1949 Rio de Janeiro, Brazil

Age: 67

Cause of death:  Stroke

Notable because: His name  lives on in financial circles.

Charles Ponzi was 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 pays early investors returns from the investments of later investors. He promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same pyramid scheme to take in $1 million

Parts of Charles Ponzi's life are somewhat difficult to determine, due to his propensity to fabricate and embellish facts. He was born Carlo Ponzi in Parma, Italy in 1882. He told the New York Times that he had come from a well-to-do family in Parma, Italy. He took a job as a postal worker early on, but soon was accepted into the University of Rome La Sapienza. His friends considered the university a "four-year vacation," and he was inclined to follow them around to bars, cafés, and the opera.On November 15, 1903, he arrived aboard the S.S. Vancouver in Boston. By his own account, Ponzi arrived in the United States in 1903 with $2.50 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.

In 1907 Ponzi moved to Montreal, Quebec, and became an assistant teller in the newly opened Banco Zarossi, a bank started by "Louis" Luigi Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6% interest on bank deposits - double the going rate at the time - and was growing rapidly as a result. Ponzi found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank eventually failed and Zarossi fled to Mexico with a large portion of the bank's money.

Ponzi stayed in Montreal and, for some time, lived at Zarossi's house helping the man's abandoned family while planning to return to the United States and start over. As Ponzi was penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer and, finding no one there, wrote himself a check for $423.58 in a checkbook he found, forging the signature of a director of the company. Confronted by police who had taken note of his large expenditures just after the forged check was cashed, Ponzi held out his hands wrist up and said "I'm guilty." He ended up spending three years in a Quebec prison. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a "special assistant" to a prison warden.

After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in an Atlanta prison. Here he became a translator for the warden, who was intercepting letters from a mobster, Ignazio "Lupo the Wolf" Saietta. Ponzi ended up befriending Lupo. However it was another prisoner who became a true role model to Ponzi: Charles W. Morse, a wealthy Wall Street businessman and speculator, fooled doctors during medical exams, poisoning himself by eating soap shavings, toxins that left his body as quickly as the doctors left his bedside. Morse was soon released from prison. Ponzi completed his prison term the summer following Morse's release, having an additional month added to his term due to his inability to pay a $500 fine.

Ponzi under arrest circa 1910

When Ponzi was released he eventually made his way back to Boston. There he met Rose Maria Gnecco, a stenographer, whom he asked to marry. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. She remained with him nonetheless, and they married in 1918. (The couple divorced circa 1937, and Rose Gnecco, who later remarried, eventually became the bookkeeper for the New Cocoanut Grove Inc, the parent company of Boston's Cocoanut Grove nightclub.) For the next few months he worked at a number of businesses, including his father-in-law's grocery, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses. Ponzi was unable to sell this idea to businesses, and his company failed soon after.

A few weeks later Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was an International reply coupon (IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.

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 First World War had much decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps to a higher value. 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 is not illegal.

Seeing an opportunity, Ponzi quit his translator's job to set his scheme in motion. He borrowed money and sent it back to relatives in Italy with instructions to buy postal coupons and send them to him. However, when he tried to redeem them in the States, he ran into an avalanche of red tape.

Undaunted, Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He delivered as promised, paying back $750 interest on initial investments of $1,250. Soon afterward, Ponzi started his own company, the "Securities Exchange Company," to promote the scheme.

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 after depositing $3 million.

By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.

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: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and brought his mother from Italy in a first-class stateroom on an ocean liner.

Ponzi's rapid rise naturally drew suspicion. However, when a Boston financial writer suggested there was no way Ponzi could legally deliver such high returns in a short period of time, Ponzi sued for libel and won $500,000 in damages. As libel law in those days placed the burden of proof on the writer and the paper, this effectively neutered any serious probes into his dealings for some time.

Nonetheless, there were still signs of his eventual ruin. Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture when he could not afford to pay for, sued Ponzi to cash in on the gold rush. 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 a run on the Securities Exchange Company as some investors decided to pull out. Ponzi paid them and the run stopped. 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 $250,000 a day.

Despite this reprieve, 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 meantime, Ponzi had hired a publicity agent, William McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He later described Ponzi as a "financial idiot" who didn't seem to know how to add.

The denouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was at least $2 million in debt, and as much as $4.5 million if interest was factored in. He went to his former employer, the Post, with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent.

The story touched off a massive run, and Ponzi told his clerks to pay everyone off. He'd taken in $20 million over eight months, but after paying out $15 million the clerks reported they'd run out of money. Ponzi scrambled around his office, trying to find more money. However, he knew there wasn't any; according to one account, he'd blown $2 million at a Saratoga Springs casino in an attempt to shore up his company.

On August 10, 1920 federal agents raided the Securities Exchange Company and shut it down. There was no large stock of postal reply coupons. The Post continued its articles, with one revealing Ponzi's jail record and publishing his (smiling) Canadian mugshots.

On August 12, 1920, federal agents arrested Ponzi. The same day, auditors revealed that Ponzi was $3 million in debt.

The news brought down six banks, including Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. The Post won a Pulitzer Prize in 1921 for its exposure of Ponzi's fraud.

Con man Ponzi circa 1910

In two federal indictments, Ponzi was charged with 86 counts of mail fraud for sending letters to his marks telling them their notes were due and to either come get their money or reinvest. At the urging of his wife, on November 1, 1920, Ponzi pleaded guilty to a single count of mail fraud before Judge Clarence Hale, who declared before sentencing: "Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel's admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out ... without receiving substantial punishment." He was sentenced to five years in federal prison.

He was released after three and a half years to face 22 Massachusetts state charges of larceny. The state charges came as a surprise to Ponzi; he thought he had a deal calling for the state to drop any charges against him if he pleaded guilty to the federal charges. He sued, claiming that as a federal prisoner he couldn't be tried by the state. The case, Ponzi v. Fessenden, made it all the way to the Supreme Court. In a 1921 decision, the Supreme Court ruled that plea bargains on federal charges have no standing regarding state charges. It also ruled that Ponzi wasn't facing double jeopardy because Massachusetts was charging him with larceny while the federal government charged him with mail fraud (even though the charges implicated the same criminal operation).

In October 1922, he was tried on the first 10 larceny counts. Being insolvent, Ponzi served as his own attorney and being as persuasive as he had been among investors, the jury found him innocent on all charges. He was tried a second time on five of the remaining larceny charges, and the jury deadlocked. Ponzi was found guilty at a third trial, and was sentenced to an additional seven to nine years in prison as "a common and notorious thief." 

After evidence surfaced that Ponzi had entered the United States illegally in 1903, proceedings were initiated to have him deported in 1922.

Ponzi was released on bail as he appealed the state conviction. He went to the Springfield section of Jacksonville, Florida and launched the Charpon (an amalgam of his name) Land Syndicate, offering investors in September 1925 tiny tracts of land, some under water, and promising 200 percent returns in 60 days.  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. The ship, however, made one last American port call; he was caught in New Orleans and sent back to Massachusetts to serve out his prison term. Ponzi served seven more years in prison.

In the meantime, 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 had gone through his hands.

Ponzi was released in 1934. With the release came an immediate order to have him deported to Italy. He asked for a full pardon from Governor Joseph B. Ely. However, on July 13, Ely turned the appeal down. His charismatic confidence had faded, and when he left the prison gates, he was met by an angry crowd. He told reporters before he left: "I went looking for trouble, and I found it." Rose stayed behind and later divorced him in 1937, as she did not want to leave Boston for his sake. But they continued to exchange hopeful love letters up until Ponzi's death.

In Italy, Ponzi jumped from scheme to scheme, but little came of them. Benito Mussolini gave him a job in the financial section of his government. However, he mismanaged things so badly that he was forced to flee to South America--but not before taking an undisclosed amount from the Italian treasury.

He eventually got a job in Brazil as an agent for Ala Littoria, the Italian state airline. During World War II, however, Brazil sided with the Allies, and the airline's operation in the country was shut down.

Ponzi spent the last years of his life in poverty, working occasionally as a translator. He had a stroke in 1948, and died in a charity hospital in Rio de Janeiro on January 18, 1949. By then he was blind in one eye and partially paralyzed.

In the charity hospital, Ponzi granted one last interview to an American reporter, telling him, "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."

Similar schemes

  • Bernard Madoff
  • Dona Branca
  • Nicholas Cosmo
  • Bernard Madoff
  • Sergei Panteleevich Mavrodi
  • Lou Pearlman
  • Tom Petters
  • Reed Slatkin
  • Hakan Yalincak


Last Updated on Friday, 13 March 2009 16:20

Add comment

Security code

Who's Online

We have 70 guests online