Double Your Money in 90 Days.
Have I got a deal
for you! I can double your money in just ninety days, guaranteed.
Nonsense, you say!
What? You don’t trust me? I promise you that it can be done.
A man named Charles Ponzi delivered on such on such a promise back in 1920.
Now, I know what you are thinking. This has to be some type of scam.
Well, I would be lying if I said that it wasn’t. (Put your money back
in the bank. You’re not getting rich this week.)
How it all started.
Carlo “Charles” Ponzi was born in Parma, Italy 1882 and then emigrated to the
United States in November of 1903. Over the next fourteen years, Ponzi
wandered from city to city and from job to job. He worked as a dishwasher,
waiter, store clerk, and even as an Italian interpreter. In 1917, he settled
back into Boston where he took a job typing and answering foreign mail.
It was here in Boston on that fateful day in August of 1919 that Ponzi discovered
the mechanism to make both him and his investors very wealthy.
At the time, Ponzi was considering issuing an export magazine. He had
written a letter about the proposed publication to a gentleman in Spain, and
when Ponzi received his reply, the man had included an international postal
reply coupon. The idea behind this enclosure was quite simple. Ponzi
was to take the coupon to his local post office and exchange it for American
postage stamps. He would then use those American stamps to send the magazine
to Spain.
Ponzi noticed that the postal coupon had been purchased in Spain for about one
cent in American funds. Yet, when he cashed it in, he was able to
get six American one-cent stamps. Just think of the possibilities if you
could do this. You could buy $100 worth of stamps in Spain and then cash
them in for $600 worth of stamps in the United States. Then cash in or
sell the stamps to a third party and you have, well, good old cash. You
just can’t get this kind of interest in the bank.
Ponzi’s mind quickly went into overdrive and devised a clever scheme to capitalize
on his idea. He was determined to be a rich man. His first step
was to convert his American money into Italian lire (or any other currency where
the exchange rate was favorable). Ponzi’s foreign agents would then use
these funds to purchase international 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 all these transactions was in excess of 400%.
Was he really able to do this? The answer is a definite no. The
red tape of dealing with the various postal organizations, coupled with the
long delays in transferring currency, ate away at all Ponzi’s imagined profits.
Things got just a bit out of hand…
A failed scheme couldn’t keep Ponzi from bragging about his great idea.
Friends and family members easily understood what he was saying and they wanted
in on the investment. And, lets face it, if you flash money in someone’s
face, they are bound to take it.
On December 26, 1919, Ponzi filed an application with the city clerk establishing
his business as The Security Exchange Company. He promised 50% interest
in ninety days and the world wanted in on it. Yet, he claimed to
be able to deliver on his promise in just forty-five days. This, of course,
translates into being able to double your money in just ninety days.
Word spread very
quickly about Ponzi’s great idea and within a few short months the lines outside
the door of his School Street office began to grow. Thousands of people
purchased Ponzi promissory notes at values ranging from $10 to $50,000.
The average investment was estimated to be about $300. (That was a big
chunk of pocket change in those days.)
You are probably sitting their puzzled. Why would so many people invest
in a scheme that didn’t work? The real reason was that the early investors
did see the great returns on their money. Ponzi used the money from later
investors to pay off his earlier obligations. It was a new twist on the
age-old pyramid scheme.
With an estimated income of $1,000,000 per week at the height of his scheme,
his newly hired staff couldn’t take the money in fast enough. They were
literally filling all of the desk drawers, wastepaper baskets, and closets in
the office with investor’s cash. Branch offices opened and copycat schemes
popped up across New England.
By the summer of 1920, Ponzi had taken in millions and started living the life
of a very rich man. Ponzi dressed in the finest of suits, had dozens of
gold-handled canes, showered his wife in fine jewels, and purchased a twenty-room
Lexington mansion.
The Crash
Any get rich scheme is certain to attract the attention of the law, and Ponzi
was no exception. From the start, federal, state, and local authorities
investigated him. Yet, no one could pin Ponzi with a single charge of
wrongdoing. Ponzi had managed to pay off all of his notes in the promised
forty-five days and, since everyone was happy to get their earnings, not a single
complaint had ever been filed.
On July 26, 1920, Ponzi’s house of cards began to collapse. The Boston
Post headlined a story on the front page questioning the legitimacy of Ponzi’s
scheme. Later that day, the District somehow convinced to suspend taking
in new investments until an auditor examined his books. (Why anyone who
was doing something so highly illegal would let auditors examine his books is
beyond me.)
Within hours, crowds of people lined up outside Ponzi’s door demanding that
they get their investment back. Ponzi obliged and assured the public that
his organization was financially stable and that he could meet all obligations.
He returned the money to those that requested it. By the end of the first
day, he had settled nearly 1000 claims with the panicked crowd.
By continuing to meet all of his obligations, the angry masses began to dwindle
and public support swelled. Crowds followed Ponzi’s every move.
He was urged by many to enter politics and was hailed as a hero. Loud
cheers and applause were coupled with people eager to touch his hand and assure
him of their confidence.
And Ponzi continued to dream. He had planned to establish a new type of
bank where the profits would be split equally between the shareholders
and the depositors. He also planned to reopen his company under a new
name, the Charles Ponzi Company, whose main purpose was to invest in major industries
around the world. (Apparently, no one ever told Ponzi that the key to
any successful swindle was to take the money and run.)
The public continued to support him until August 10, 1920. On this date,
the auditors, banks, and newspapers declared that Ponzi was definitely bankrupt.
Two days later, Ponzi confessed that he had a criminal record, which just worsened
his situation. In 1908, he had served twenty months in a Canadian prison
on forgery charges related to a similar high-interest scheme that he had participated
in there. This was followed in 1910 by an additional two-year sentence
in Atlanta, Georgia for smuggling five Italians over the Canadian border into
the United States.
On August 13th, Ponzi was finally arrested by federal authorities and released
on $25,000 bond. Just moments later he was rearrested by Massachusetts
authorities and re-released on an additional $25,000 bond.
In the end…
The whole thing turned into one gigantic mess. There were federal and
state civil and criminal trials, bankruptcy hearings, suits against Ponzi, suits
filed by Ponzi, and the ultimate closing of five different banks.
Of course, we cannot forget the problem of trying to settle Ponzi’s accounts
in an attempt to return all of the people’s investments.
An estimated 40,000 people had entrusted an estimated fifteen million dollars
(about $140 million in U.S. funds today) in Ponzi’s scheme. A final audit
of his books concluded that he had taken in enough funds to buy approximately
180,000,000 postal coupons, of which they could only actually confirm the purchase
of two.
Ponzi’s only legitimate source of income was $45 that he received as a dividend
of five shares of telephone stock. His total assets came to $1,593,834.12,
which didn’t come close to paying off the outstanding debt. It took about
eight years, but note holders were able to have an estimated thirty-seven percent
of their investment returned in installments. In other words, many people
lost big time.
Ultimately, Ponzi was sentenced to five years in federal prison for using the
mails to defraud. After three and one-half years in prison, Ponzi was
sentenced to additional seven to nine years by Massachusetts’s authorities.
He was released on $14,000 bond pending an appeal and disappeared about one-month
later.
Where did he go? Did he leave the country? Did he just vanish off
of the face of the Earth? No one was really sure.
No, he turned up a short time later in the great state of Florida. Under
the assumed name of Charles Borelli, Ponzi was involved in a pyramid (big surprise,
huh?) land scheme. He was purchasing land at $16 an acre, subdividing it into
twenty-three lots, and selling each lot off at $10 a piece. He promised
all investors that their initial $10 investment would translate into $5,300,000
in just two years. Forget doubling your money in ninety days – he was
now promising to double your money nearly every second! Too bad much of
that much of the land was underwater and absolutely worthless.
Ponzi was indicted for fraud and sentenced to one year in a Florida prison.
Once again, he jumped bail on June 3, 1926 and ran off to Texas. He hopped
a freighter headed for Italy, but was captured on June 28th in a New Orleans
port. On June 30th he sent a telegram to President Calvin Coolidge asking
to be deported. Ponzi’s request was denied and he was sent back to Boston
to complete his jail term. After seven years, Ponzi was released on good
behavior and deported to Italy on October 7, 1934. Believe it or not,
even after all of his swindling, he still had many fans that were there to give
him a rousing sendoff.
Back in Rome, Ponzi became an English translator. Mussolini then offered
him a position with Italy’s new airline and he served as the Rio de Janeiro
branch manager from 1939-1942. Ponzi discovered that several airline officials
were using the carrier to smuggle currency and Ponzi wanted a cut. When
they refused to include him, he tipped off the Brazilian government. The
Second World War brought about the airline’s failure and Ponzi soon found himself
unemployed.
Once again, he wandered from job to job. He tried running a Rio lodge,
but that failed. He then alternated between earning a pittance providing
English lessons and drawing from the Brazilian unemployment fund.
Ponzi died in January of 1949 in the charity ward of a Rio de Janeiro hospital.
Somehow, the man who had gone from poverty to multi-millionaire and right back
to poverty in a matter of six months had managed to save up $75 to cover the
costs of his burial. He left behind an unfinished manuscript appropriately
titled “The
Fall of Mister Ponzi”. And what a rise and fall it was.