The Crime Book

106

even stored in his wastebaskets.

Convinced of his genius, investors

mortgaged their homes and

invested their life savings with

Ponzi. Most did not take their

profits when offered, but instead

reinvested, trusting him to increase

their wealth even further. In

February 1920, Ponzi was

promising customers a 50 per cent

profit a mere 45 days after their

investment. Soon, that number was

raised to 100 per cent, sparking

even more investment.

Ponzi deposited the money in

Boston’s Hanover Trust Bank – in

which he also bought a controlling

stake. With the ever-increasing

influx of cash, Ponzi revelled in his

new life of luxury: he bought a

mansion with a heated pool in

Lexington, smoked cigars from

diamond holders, and bought

dozens of gold-handled canes for

parading around town.

CHARLES PONZI

Questions raised

While Ponzi was making money,

his operation was running at a

tremendous loss, using money

collected from new investors to pay

the promised returns to earlier

investors. This type of scheme,

which “borrows from Peter to pay

Paul”, eventually came to be named

after Charles Ponzi himself.

By the middle of 1920, Ponzi was

making about $250,000 (£1.9 million)

a day, but local newspapers began

to investigate when a furniture

dealer publicly claimed that Ponzi’s

cheques had bounced. The Boston

Post responded with a series of

articles asking hard questions about

Ponzi’s money machine, noting that

he himself was not investing with

his own company.

Around the same time, the

Commonwealth of Massachusetts

got involved. Although Ponzi was

questioned by state officials, he

steered them away from inspecting

his books – his helpful offer to

refuse new investments during

their investigation calmed their

suspicions. When the US Attorney

for Massachusetts did look at the

books, he just found a box of index

cards bearing investors’ names.

In July came another blow: the

US Post Office confirmed that Ponzi

could not be making the returns he

had claimed on the international

postal coupons – there were not

enough of them in circulation. The

Post reported this, too, and Ponzi

filed a suit against the newspaper,

before spinning a yarn about

purchasing coupons in Italy and

selling and reselling throughout

Europe. He convinced nobody.

On 2 August 1920, newspapers

declared Ponzi to be insolvent.

As investors pulled out, Ponzi

struggled to find the money to

pay them what they were owed.

A pyramid scheme promises high returns to

investors, who are paid back through the

investments of later investors. As with all

pyramid schemes, Charles Ponzi’s was

mathematically unsustainable because each

round needs to involve at least double the

number of investors as the previous round.

Four friends of

the first round

investors

The schemer

In the first round, the

schemer takes a $1,000

investment from two

investors, promising to

double their money.

In the second round, the schemer

finds four more investors and gets them

to invest $1,000 each. With this $4,000,

he pays back the first round investors.

In the third round, he needs $8,000 to

pay the second round investors, and finds

eight investors to invest $1,000 each. The

first round investors are pleased with the

results, reinvest, and tell their friends.

The scheme grows and the schemer is

able to make payments to himself.

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107

A large crowd gathers outside

Charles Ponzi’s Boston office in July

1920 after The Boston Post published

a number of articles questioning his

business practices.

WHITE COLLAR CRIMES

By 9 August, his main bank

account was overdrawn and the

district attorney froze it. Knowing

his arrest was imminent, Ponzi

surrendered to federal authorities

on 12 August 1920. He was charged

with 86 counts of mail fraud.

Final years

Ponzi had lost around $20 million

(£150 million) of investors’ money.

While some were paid, Ponzi was

short by $7 million (£53 million). His

arrest brought down six large state

banks, including the Hanover Trust.

Many investors were financially

crippled, receiving under 30 cents

for each dollar they were owed.

The impulsive Ponzi used his

bail release to flee to Florida, where

he launched the “Charpon Land

Syndicate,” another Ponzi scheme

selling swampland to investors

with the promise of substantial

returns on their money. Ponzi was

arrested for fraud and sentenced

to one year in prison, but he was

freed on appeal.

In New Orleans, he was caught

trying to flee to Italy by boat –

despite shaving his head and

growing a moustache to disguise

himself – and was sent back to

finish his original jail sentence in

Boston. Deported to Italy in 1934,

he tried a few more unsuccessful

schemes in Italy before moving to

Brazil, where he died, in 1948. ■

How Ponzi schemes

impact the economy

Ponzi schemes inflict severe

financial damage on investors

and the economy by diverting

money away from productive

and legitimate investments.

The bigger the scam, the more

damage it causes, particularly

once large banks become

involved. When the scheme

is revealed, investors can

lose confidence in those

institutions and are reluctant

to invest in them again.

Discovering and closing

down Ponzi schemes can be

difficult. Often, neither the

perpetrators nor the schemes

themselves are regulated. And

even in regulated institutions,

Ponzi schemes may use

technical language to hide

their true nature.

Ponzi schemes that violate

a number of financial laws

may be investigated

separately by more than one

regulator, which makes it hard

for the bigger picture to

emerge. The financial

significance of the institutions

that have invested in the

scheme can also make

regulators reluctant to

investigate, believing that the

institutions are too big to fail.

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