Charles Ponzi

From Wikipedia, the free encyclopedia

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. Although many people have never heard of Ponzi, the term "Ponzi scheme" is a well known description of fraud that continues to this day through its modern version, the "make money fast" schemes that percolate through the Internet.

Contents 1 Early life 2 Arrival in America 3 The Ponzi Scheme 4 Suspicion 5 Collapse 6 Prison and later life 7 References

[edit] Early life

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 Lugo, Italy in 1882-- not Parma as some accounts hold, although he resided there as a teenager.^{[citation needed]} He took a job as a postal worker early on, but soon was accepted into the University of Rome. His friends considered the university a "four-year vacation", and he was inclined to follow them around to bars, cafés, and the opera. At some point, short on funds, Ponzi dropped out of university and boarded the S.S. Vancouver bound for Boston, USA.

[edit] Arrival in America

By his own account, Ponzi arrived in the United States in 1903 with two dollars and fifty cents in his pocket, having lost the rest of his life savings through gambling during the voyage. He was not discouraged. He quickly learned how to speak and read English, and spent the next few years doing odd jobs along the East Coast, eventually taking 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. He was later fired for shortchanging the customers and playing games with the bills.

Ponzi was unfazed. In 1907, he moved to Montreal, Canada, and became an assistant teller in the newly opened Banco Zarossi, a bank started by Luigi "Louis" Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6 percent interest on bank accounts, double the going rate then, and was growing rapidly as a result. Among Ponzi's 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. It also appeared that Zarossi was funding the interest payments not through those investments, but by raiding the savings of newly opened accounts. The scheme 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. Penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer, and finding no one there, pulled out their checkbook and wrote himself a check for $423.58, signing it in the handwriting 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.

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. Here he became a translator for the warden, who was intercepting letters from a famous mobster, Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo, but it was another prisoner who became a true role model to Ponzi; Charles Morse convinced doctors he was dying by eating soap shavings, and was released early. Ponzi convinced himself at that time that the rich could do what they wanted, and decided to become rich and live the easy life.

[edit] The Ponzi Scheme

Main article: Ponzi scheme

When Ponzi was released he eventually made his way back to Boston. There he met an Italian girl, Rose Gnecco, who was swept off her feet by Ponzi's charm. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. Gnecco's love for Ponzi remained unswayed. By 1918 they were married. For the next few months he worked at a number of businesses, before hitting upon an idea to sell advertising in a large catalog to be sent to various businesses, similar to the yellow pages. The idea never got off the ground, 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 a postal reply coupon, which he had never seen before. He asked about it, and the Ponzi scheme was born. The basic idea behind the postal reply coupon was to allow the sender to buy stamps in the foreign country for reply mail, instead of requiring the recipient to pay for them. For instance, a lawyer could send a document to England for reading, including a coupon that would pay for English stamps to allow the recipient to send it back.

The rates for the coupons had originally been fixed during an international postal union in 1907, setting the local price of each coupon to buy an equal amount of stamps in any country. For instance, one might pay 4 shillings in England for a coupon, or $1 in the US, the two amounts being equal at the time. When the war ended, many European currencies were massively devalued. However, because the exchange rate on the coupons was not changed, one could buy such a coupon for the original rate and exchange it for stamps at the current exchange rate.

Ponzi noticed the postal coupon purchased in Europe for about one cent in American funds could be cashed in for about six American one-cent stamps. The first step was to convert his American money into a currency where the exchange rate was favorable. Ponzi's foreign agents would then use these funds to purchase postal coupons in countries with weak economies. The stamp coupons were then exchanged back into a favorable foreign currency and finally back into American funds. He claimed that his net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or buying low and selling high--such a transaction is not in itself illegal.

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. 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. 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.

[edit] Suspicion

There were signs of Ponzi's eventual ruin: a furniture dealer who had given Ponzi furniture, when he was broke, tried to sue 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 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 24 July 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 $250,000 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 US state of Massachusetts, and on the same day the Post article was printed, Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation. For Ponzi, 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.

[edit] 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.

Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27 thousand coupons were actually circulating. The United States Postal Service stated that postal reply coupons were not being bought 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 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 him.

Instead, he stayed where he was and continued to pay out. Ponzi wanted to look as honest as possible, and according to his autobiography, he was always hoping he could use the fortune he was accumulating to start a legitimate business that would make enough money to pay back all his investors and make everyone rich. Among the ideas he floated was buying a $300 million American warship and turning it into a floating shopping mall, promoting patriotism and commerce by stocking it with American goods. However, like most of Ponzi's business plans this was wild and absolutely impossible; if he ever had $300 million to spend from his out-of-control scheme, he would be that much in debt ($3 billion in 2006 dollars) before he sold a single thing from his ship.

In the short term, Ponzi had hired a publicity agent, James McMasters. However, McMasters quickly became suspicious of Ponzi's contradictions at board meetings and 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. No large stock of postal reply coupons was found, and never would be. The Hanover Trust Bank would be shut down as well.

The Post continued their articles, with one revealing Ponzi's jail record and publishing his (smiling) Canadian mug shots. By August 13, 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 thousand 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.

[edit] Prison and later life

On 1 November 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. He was again found guilty and sentenced to nine years. Before entering state prison, Ponzi jumped bail and fled to Florida, where he set up a scam to sell "prime Florida property" to gullible investors. Florida authorities quickly wised to Ponzi's scam. 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 Ponzi's convoluted accounts to figure out how much money he had taken 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 and was immediately deported to Italy since he never had become an American citizen. His flashy confidence had faded by that time, 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, as she did not want to leave Boston for his sake. However, 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. He eventually got a cozy job as the agent for Ala Littoria, the Italian state airline, in Brazil. However, during World War II, the Brazilians, who had sided with the Allies, realized the Italians were using the airline to ship strategic materials and shut it down.

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 18 January 1949. His life had been characterized by one great moment of glory surrounded by outlandish, wild ventures which inevitably lost him money. In the charity hospital, Ponzi granted one last interview to an American reporter, and 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!"

[edit] References

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

• Zuckoff, Mitchell. Ponzi's Scheme: The True Story of a Financial Legend. Random House: New York, 2005. (ISBN 1-4000-6039-7)
• The History Channel. "In Search of History: Mr. Ponzi and His Scheme". February 9, 2000. (AAE-42325, ASIN 0767016726)