Charles Ponzi

What made Charles Ponzi's name stick in the annals of history? Certainly confidence men existed prior to Ponzi taking Boston by storm in 1920. The others that have since followed in his footsteps have bilked more people out of more money than some would think possible, but those names are forgotten.

Ponzi didn't even invent the scam to which his name ultimately became attached. That honor likely resides with a Brooklyn bookkeeper by the name of William "520 per-cent" Miller, who ran a similar scheme 20 years before Ponzi. Miller managed to rake in more than one million dollars in his heyday, which was quite a tidy sum in 1899. Yet such a con is not known as a "Miller scheme" today, but a "Ponzi scheme". Why is that?

The answer, in a word, is style. Ponzi had panache. His charm and apparent credibility, combined with a good deal of cockiness, captivated his gullible investors. Even as they were hauling Ponzi off to prison, his investors clung to the belief that, had The Boston Post newspaper and the government not become involved, Ponzi would have delivered on his exaggerated promises.

Prior to the trial that sent him to prison, Ponzi appeared to be a Horatio Alger story come to life. He was born Carlo Ponzi in Italy, likely in 1882. At the age of 19, Ponzi immigrated to America, knowing only a little English and with less than $5 in his pocket.

Ponzi knocked around the country seeking work where he could find it. Sometimes, the legality of his job choices was rather questionable. In 1907, he became entangled in a bank collapse in Montreal, Canada. Caught attempting to cash a forged check from the bank, Ponzi was sentenced to serve three years in prison. Upon his release, he attempted to make some quick money smuggling immigrants across the Canadian border into the US. That endeavor cost him another two years in prison.

Eventually, Ponzi landed in Boston. It was there that he met Rose Gnecco, and the pair married in 1918. Still seeking his personal fortune, Ponzi attempted to go into business for himself, marketing an advertising catalog he developed. Though the venture wasn't successful, it was during this time that Ponzi stumbled upon the idea that would make him infamous.

A request regarding his catalog arrived from overseas and included an international reply coupon. According to Ponzi, he had never seen one of these postal coupons prior to that fateful day. The coupons worked rather simply. A purchaser in a foreign country could buy a reply coupon from his post office, and then send it to Ponzi in America. When he received this coupon, Ponzi could take it to the US post office and exchange it for the proper postage to send a reply back to the original purchaser.

Upon doing a little research into these postal coupons, Ponzi discovered a profitable flaw. Thanks to the depressed economies in Europe following World War I, exchange rates were heavily in America's favor. A smart man, with a little money and the right connections, could profit from these discrepancies — provided he could figure out a way to sell the stamps that ultimately came out of the deal. Ponzi felt he was such a man.

One thing should be made clear at this point. What Ponzi was engaging in was not illegal. In fact, it was rather crafty. On a small scale, one could have profited very well from this plan, much like playing the currency market today. It was the next steps Ponzi took that put him on a path toward infamy rather than obscurity.

To seize upon this opportunity, Ponzi decided to find investors. With his past criminal record and a plan that involved dealing in postal stamps, however, no serious investor or bank would consider backing Ponzi. Instead, Ponzi went directly to the common citizen.

Beginning with his fellow Italian immigrant neighbors, in late 1919, Ponzi lured investors by promising the incredible: a 50 percent return on one's investment, in just 90 days. Without explaining more than the fact that he found an advantage within international exchange rates, Ponzi was able to take in some tentative investors' money. He never cared how much one invested — $5, $50 or $500 — Ponzi took it all, often only issuing hurried, handwritten receipts to his customers.

It wasn't only his ridiculous offer that brought people to him. Working in Ponzi's advantage was the general distrust of the banking system. The US had seen a fair share of its banks fail, taking its investors' money down with them. Immigrants especially were fearful. They didn't trust the banks, nor did they always understand them. Ponzi, however, was one of their own and he promised Wall Street-like returns without ever having to set foot inside a bank.

Wanting to seize upon the growing hoopla, Ponzi hired agents to work for him. This agent pool was comprised mostly of former satisfied customers. Working for Ponzi to lure other potential investors, they often used their own personal testimony to prove Ponzi's reliability. Ultimately, Ponzi's agents were the smartest group caught up in his scheme. They received incredible commissions for their sales, yet never faced prosecution for their involvement in Ponzi's scheme.

When some investors began to get jittery, Ponzi altered the deal on the fly. He promised to give them their 50 percent returns in just 45 days. When he delivered on those notes, word spread among the tight-knit Italian neighborhoods like wildfire. As his reputation grew, so too did the numbers of investors and their investments.

In 1920, Ponzi officially opened the Securities and Exchange Company (pre-dating the US government's Securities and Exchange Commission by some 13 years). Located in the Niles Building at the end of Pi Alley in Boston, crowds began to grow to the point where they would fill the alleyway and spill out onto the main street. Ponzi had one standing rule for his employees — take any and all money. To handle the incredible influx of cash, the Securities and Exchange Company's tellers would literally toss investors' money in emptied trash cans or stuff it into their own pockets. Needless to say, the accounting practices of the office were shoddy at best.

The amount of money Ponzi was collecting increased almost exponentially. By March of 1920, his company took in nearly $30,000. In May, Ponzi's receipts tallied over 10 times that amount, and by mid-summer, he was raking in millions. Branches of Ponzi's company popped up around New England, including offices in Connecticut and New Hampshire, to handle the growing demand.

As Ponzi's business grew, so too did his personal wealth. He relished spending it. With Rose, Ponzi bought a 22-room mansion spread out on five acres of land. He would arrive at the Securities and Exchange Company in a limousine, dressed as dapper as a man could and met with the adoring crowd gathered there to invest with him. He rarely worked; instead he kept up appearances in and around the office.

The press soon became interested in the exciting little man. Duped by his slick talk and smooth demeanor, they dubbed him "the Wizard of Wall Street". Newsreels were made detailing his genius. Shortly thereafter, imitators sprang up in and around Boston, offering similar deals as Ponzi, while claiming to also invest in postal coupons.

As his fame and fortune grew, so too did the questions regarding his business. His downfall officially began when a former "business partner" of Ponzi's sued him for $1 million. The story was covered by The Boston Post. Despite the fact that the newspaper was located around the corner from Ponzi's office, publisher Richard Grozier was unaware of Ponzi. He quickly grew suspicious as he learned more about Ponzi from his employees, some of which had invested with him. Not believing Ponzi's claims, Grozier launched the investigation that would ultimately bring his paper the Pulitzer Prize.

One of the first actions The Boston Post took was to bring Clarence Barron (the founder of Barron's) to examine Ponzi's business. Barron put Ponzi's postal coupon scheme to the test and quickly realized that the number of coupons Ponzi would need to cover his investments reached into the hundreds of millions. The US Postal Service chimed in to add that there weren't more than 30,000 coupons in current circulation. Always the con man, Ponzi boasted that it didn't matter because he never said he was using US postal coupons, rather he spread his operation around the world and did most of his dealings outside of the US. The joke was on Ponzi — there weren't that many coupons available in the entire world.

To counter the public's growing concerns, Ponzi attempted to legitimize himself. He hired a well-known publicity man, James McMasters, to smooth things over with The Boston Post and other newspapers. Ponzi also bought a controlling interest in the Hanover Trust Company Bank, officially turning himself into a banker. The backing of his bank helped solidify, at least in his investors' eyes, the actions occurring within the Securities and Exchange Company.

While some reporters remained enamored with Ponzi's style, Grozier and The Post kept hammering away at his operation. The Post's columns alerted the government that something odd was occurring at the end of Pi Alley. Soon after, Ponzi met with the state's attorney general, who left the meeting completely unimpressed with Ponzi's slippery talk. He ordered an audit of his finances. When word of the attorney general's actions hit the street, Ponzi's company faced a monumental run.

Ponzi was on the scene to mitigate the frantic mob packed into Pi Alley. He delivered coffee and donuts to the crowd. He assured them their money was safe, and once the state's accountants saw his books, they too would back his claims. It was at this time that the most famous exchange of words reportedly occurred.

As Ponzi comforted the crowd, one of the people in line shouted out, "You're the greatest Italian of all!" Ponzi turned, and with the crowd hushed, responded, "No. There have been two greater. Columbus, who discovered this great land, and Marconi, who invented the wireless." The instigator shouted back, "But Ponzi, you invented money!" to which the crowd cheered wildly.

The devoted faith of the people was shattered when Ponzi's pressman McMasters turned on his boss. Seeing up close that Ponzi was a blatant fraud, McMasters lent his services to The Boston Post. The resulting story labeled Ponzi hopelessly insolvent. It described how he had simply been paying off early investors with the later investors' money, a cycle that worked as long as there was more money coming in than going out.

Yet when the second run on Ponzi's Securities and Exchange Company ended in early August, Ponzi had paid out over $2 million in just three days. A week later, federal agents shut Ponzi down, closing both the Securities and Exchange Company along with the Hanover Trust Company Bank, which he had driven into the ground.

The ensuing audit discovered receipts tallying over $15 million for investments in Ponzi's company. At the time of his arrest, Ponzi had more than $4 million in assets and $7 million in liabilities. The rest of the money was unaccounted for, yet included in his personal assets was $61 worth of postal reply coupons.

On his lawyer's advice, Ponzi pleaded guilty in federal court to a charge of mail fraud. The judge sentenced him to five years. When he was released more than three years later, Ponzi had to face state charges. Acting as his own lawyer, Ponzi was acquitted on all counts. In another state trial on separate charges, Ponzi was convicted and sentenced to another seven to nine years.

In 1934, having served yet another prison term, this time for selling swamp land in Florida, Ponzi was deported. His wife Rose, who had lovingly, and perhaps naively, stood beside him through all of this turmoil, finally filed for divorce in 1936. Ponzi would die, broke and alone, in Brazil in 1949, still clinging to the claim that his business was legitimate and he had done nothing illegal.

Brian Tuohy. Inventing Money: The Ponzi Scheme. History Magazine. June/July 2009.

Ponzi's Scheme: The True Story of a Financial Legend In 1920, Charles Ponzi raked in millions of dollars by promising people he would double their investments in three months. Only later did anyone realize he was paying old investors with money from new ones, a trick known as robbing Peter to pay Paul. While it lasted, Ponzi's scheme made some people rich beyond their wildest dreams, most of all Ponzi himself. When it ended, it rocked the nation with a spectacular fiscal explosion. Ponzi is the first nonfiction account of the irresistible scoundrel who launched the most successful bit of financial alchemy in our history--and uttered the first roar of the Roaring Twenties. In Zuckoff's hands, Ponzi is no mere swindler; instead he is appealing and magnetic, a colorful and poignant figure. Ponzi is a classic American tale of immigrant life and the dream of success, and the unexpectedly moving story of a man who --for a fleeting, illusory moment--attained it all.

---

top of page

back a page