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I
n July 1920, Charles Ponzi’s
grand financial scheme was
collapsing. As the authorities
tracked his every move, panicked
investors crowded outside his
Boston office demanding their
money back. The details of his
scam were splashed over the front
pages of the Boston newspapers.
Confident and charming as ever,
Ponzi seemed unfazed. Dressed in
a designer suit, he faced the horde
of angry investors with a smile. For
the next three days, Ponzi placated
the crowd, handing out more than
$2 million (about £15 million today)in cash. As well as the banknotes,
he passed out coffee and doughnuts,
convincing investors that they had
no reason to worry. However, Ponzi’s
brazen display attracted the
attention of the US Attorney for the
District of Massachusetts. An audit
was commissioned on Ponzi’s
finances, which unravelled one of
the most notorious and remarkable
scams in US history.A keen entrepreneur
Unlike some of his fraudster
successors, Ponzi did not appear to
start out with nefarious intentions.
In 1903, at the age of 21, the Italian
immigrant arrived in Boston with
just $2.50 (£48 today) in his pocket.
Although he was broke, Ponzi
had an enduring entrepreneurial
spirit, and longed to make a name
for himself. He picked up English
quickly and travelled around
the East Coast of America, takingCHARLES PONZI
Charles Ponzi smiles for a police
mugshot following his arrest for forgery
in Montreal, Canada, in 1909. At the
time, Ponzi went by one of his many
aliases, Charles P. Bianchi.a number of temporary jobs, such
as working as a waiter and
translator. Ponzi moved to Montreal
in 1907, where he got a job at the
Bank Zarossi and worked his way
up to become a manager.Early crimes
The bank he worked at failed,
leaving Ponzi feeling desperate.
He forged a cheque hoping to raise
enough funds to return to the US,
but was caught, and spent three
years in a bleak prison facility on
the outskirts of Montreal. Upon his
release, he returned to the US, only
to spend two years in an Atlanta
prison for smuggling Italian
immigrants into the country.
Whether it was due to his
circumstances or his character,
being a crook soon became second
nature to Ponzi.
After his release, Ponzi returned
to Boston. He met a stenographer,
Rose Maria Gnecco, and they
married in 1918. For the next few
months, Ponzi worked a variety of
jobs, including one for his father-in-
law, while all the time dreaming up
ideas for businesses.
He hoped to make it big with a
new venture, a trade magazine, but
by 1919 this too seemed doomed to
failure. Faced with not being ableIN CONTEXT
LOCATION
Boston, Massachusetts, USTHEME
Ponzi schemeBEFORE
1899 William “520 Percent”
Miller runs a pyramid scheme
in New York, swindling
investors out of $1 million (£19
million today) with the promise
of 10 per cent interest a week.1910 A man calling himself
Lucien Rivier sets up a bank in
Paris and defrauds 6,000
investors of around 2 million
francs (£6.5 million today).AFTER
2010 A whistle-blowing
employee brings down
Minnesota businessman
Tom Petters’s $3.65 billion
(£2.5 billion) scheme.1991–2009 Texan Allen
Stanford runs a $7 billion (£5
billion) 20-year scheme through
his Antigua-based bank.I landed in this country with
$2.50 in cash and $1 million in
hopes, and those hopes never
left me.
Charles Ponzi102-107_Charles_Ponzi.indd 104 12/12/2016 17:12
105
International Reply Coupons,
which could be exchanged for postage
stamps, inspired Ponzi’s scam. This
particular design was adopted by the
Universal Postal Union in 1906.to afford the following month’s rent
for his office, desperation was
setting in again.
It was around this time that
Ponzi received a letter from Spain
with an unusual document inside.
Similar to a self-addressed stamped
envelope, the internal reply coupon
(IRC) looked like money but was
actually a system for prepaying
international postage. It could be
redeemed in various parts of the
world, but the fixed prices did
not reflect the dramatic post-war
devaluation of some currencies.
Ponzi realized that he could turn
a profit if he bought the coupons in
Italy, where they were relatively
cheap, and exchanged them for
more expensive stamps in the US.
Although Ponzi did not have a
plan for converting the coupons into
cash, he figured that he could make
a profit of $2.30 (£14 today) for every
$1 (£6) that he invested. Realizing
the potential for a business venture,Ponzi obtained a loan and sent the
money to his family back home in
Italy. He asked them to purchase
postal coupons and send them back
to him in the US. He reportedly
made more than 400 per cent profit
on some of his sales.Generating investment
The scheme was not illegal – Ponzi
was buying an asset at a lower
price and selling it for a high price
in a different market – but he had
no idea how to redeem the coupons
for cash. Undaunted, he promised
friends and investors that he could
double their investment in 90 days.
He confidently explained that the
fantastic returns on the postal reply
coupons made profiting simple.
Many investors were paid as
promised, receiving $750 (£4,635)
interest on initial investments of
$1,250 (£7,725). However, these
profits did not come from trading in
IRCs. Instead, Ponzi paid back hisSee also: Bernie Madoff 116–21 ■ Jérôme Kerviel 124–25WHITE COLLAR CRIMES
initial investors using money from
new investors, while all of his
investors were kept unaware of his
methods. To add a sheen of
legitimacy to his endeavour, Ponzi
opened his own company, the
Security Exchange Company. Word
quickly spread about the returns he
had produced, and an initial tiny
pool of investors soon expanded into
Boston’s elite society, fuelled by the
impressive rates that initial
investors were being paid.
Whether it was a scam from the
beginning, or whether Ponzi
intended to pay the investors once
he figured out how to convert the
coupons into cash, is unclear, but
Ponzi made no effort to generate
legitimate profits. Eventually, he
stopped purchasing IRCs and kept
all of the money for himself. By
June 1920, Ponzi had made $2.5
million (£19 million) from about
7,800 customers. His desk drawers
overflowed with cash; money was ❯❯He is one of the best examples
of misdirected energy in the
annals of American crime.
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