Charles Ponzi
Encyclopedia
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882- January 18, 1949), commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy, he became known as a swindler in North America for his money making scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term "Ponzi scheme
" was coined because of it and the term now refers to scams which pay early investors out of the investments of later investors. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage
. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.
. His friends considered the university a "four-year vacation," and he was inclined to follow them around to bars, cafés, and the opera.
. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.
In 1907, Ponzi moved to Montreal
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% interest on bank deposits – double the going rate at the time – and was growing rapidly as a result. Ponzi eventually rose to bank manager. However, he found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank 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. As Ponzi was penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer Canadian Warehousing and, finding no one there, wrote himself a check for $423.58 in a checkbook he found, forging the signature of a director of the company, Damien Fournier. 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 the prison St. Vincent-de-Paul near Montreal. 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.
After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison
. Here he became a translator for the warden, who was intercepting letters from mobster Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo. However it was another prisoner who became a true role model to Ponzi: Charles W. Morse
. Morse, a wealthy Wall Street businessman and speculator, fooled doctors during medical exams, poisoning himself by eating soap shavings, toxins that left his body as quickly as the doctors left his bedside. Morse was soon released from prison. Ponzi completed his prison term the summer following Morse's release, having an additional month added to his term due to his inability to pay a $500 fine.
A few weeks later, Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was an international reply coupon
(IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.
The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage
, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.
Seeing an opportunity, Ponzi quit his translator's job to set his scheme in motion. He borrowed money and sent it back to relatives in Italy with instructions to buy postal coupons and send them to him. However, when he tried to redeem them, he ran into an avalanche of red tape
.
Undaunted, Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.
Soon afterward, Ponzi started his own company, the "Securities Exchange Company," to promote the scheme. He set up shop in a building on School Street
. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).
He began depositing the money in the Hanover Trust Bank of Boston (a small bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he did, in fact, buy a controlling interest in the bank (through himself and several friends) after depositing $3 million. By July 1920, he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.
Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts, with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner. She died soon afterward.
Nonetheless, there were still signs of his eventual ruin. Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued 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 penniless 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 and the run stopped. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi's good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The next business day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.
Despite this reprieve, Post acting publisher Richard Grozier and city editor Eddie Dunn were suspicious and assigned investigative reporters to check Ponzi out. He was also under investigation by the Commonwealth of Massachusetts, and on the day the Post printed its article, Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation, a fortunate choice, as proper records were not being kept. Ponzi's offer temporarily calmed the suspicions of the state officials.
financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not 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 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.
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. However, this attracted the attention of Daniel Gallagher, the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company's books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors' names.
In the meantime, Ponzi had hired a publicity agent, William McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He later described Ponzi as a "financial idiot" who did not seem to know how to add.
The dénouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.
However, trouble came from an unexpected quarter—Massachusetts Bank Commissioner Joseph Allen. An initial investigation into Ponzi's banking practices found nothing illegal, but Allen was afraid that if massive withdrawals exhausted Ponzi's reserves, it would bring Boston's banking system to its knees. When Allen found out a large number of Ponzi-controlled accounts had received more than $250,000 in loans, he ordered two bank examiners to keep an eye on Ponzi's accounts. On August 9, they reported that enough investors had cashed their checks on Ponzi's main account there that it was almost certainly overdrawn. Allen then ordered Hanover Trust not to pay out any more checks from Ponzi's main account. He also orchestrated an involuntary bankruptcy filing by several small Ponzi investors. The move forced Massachusetts Attorney General J. Weston Allen
to release a statement that there was little to support Ponzi's claims of large-scale dealings in postal coupons. State officials then invited Ponzi note holders to come to the Massachusetts State House to furnish their names and addresses for the purpose of the investigation. On the same day, Ponzi received a preview of Pride's audit, which revealed Ponzi was at least $7 million in debt.
On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi's scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi's last-ditch plan to "borrow" funds from the bank vaults after all other efforts to obtain funds failed.
With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.
in 1921 for its exposure of Ponzi's fraud.
He was released after three and a half years and was almost immediately indicted on 22 Massachusetts state charges of larceny
. This came as a surprise to Ponzi; he thought he had a deal calling for the state to drop any charges against him if he pleaded guilty to the federal charges. He sued, claiming that as a federal prisoner he could not be tried by the state. The case, Ponzi v. Fessenden, made it all the way to the Supreme Court of the United States. On the 27th of March, 1922, the Supreme Court ruled that plea bargains on federal charges have no standing regarding state charges. It also ruled that Ponzi was not facing double jeopardy because Massachusetts was charging him with larceny while the federal government charged him with mail fraud (even though the charges implicated the same criminal operation).
In October 1922, he was tried on the first ten larceny counts. Since he was insolvent, Ponzi served as his own attorney and, being as persuasive as he had been with his duped investors, the jury found him not guilty on all charges. He was tried a second time on five of the remaining charges, and the jury deadlocked. Ponzi was found guilty at a third trial, and was sentenced to an additional seven to nine years in prison as "a common and notorious thief."
After word got out that Ponzi had never obtained American citizenship (despite having lived in the United States for most of the time since 1903), federal officials initiated efforts to have him deported as an undesirable alien in 1922.
Ponzi was released on bail as he appealed the state conviction. He went to the Springfield neighborhood of Jacksonville, Florida and launched the Charpon Land Syndicate ("Charpon" is an amalgam of his name), offering investors in September 1925 tiny tracts of land, some under water, and promising 200 percent returns in 60 days. In reality, it was a scam that sold swampland in Columbia County
. Ponzi was indicted by a Duval County grand jury in February 1926 and charged with violating Florida trust and securities laws. A jury found him guilty on the securities charges, and the judge sentenced him to a year in the Florida State Prison. Ponzi appealed his conviction and was freed after posting a $1,500 bond.
Ponzi traveled to Tampa
, where he shaved his head, grew a moustache, and tried to flee the country as a crewman on a merchant ship bound for Italy. The ship, however, made one last American port call; he was caught in New Orleans and sent back to Massachusetts to serve out his prison term. Ponzi served seven more years in prison.
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 managed to untangle it and could conclude only that millions had gone through his hands.
Ponzi was released in 1934. With the release came an immediate order to have him deported to Italy. He asked for a full pardon from Governor Joseph B. Ely
. However, on July 13, Ely turned the appeal down. His charismatic confidence had faded, 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 in 1937, as she did not want to leave Boston. Rose, who later remarried, eventually became the bookkeeper for the New Cocoanut Grove Inc, the parent company of Boston's Cocoanut Grove
nightclub.
In Italy, Ponzi jumped from scheme to scheme, but little came of them. He eventually got a job in Brazil as an agent for Ala Littoria
, the Italian state airline. During World War II, however, Brazil sided with the Allies, and the airline's operation in the country was shut down. During that time, Ponzi also wrote his autobiography.
Supported by his last and only friend who spoke English and had notions of Italian, the barber Francisco Nonato Nunes, was how Mr. Ponzi granted one last interview to an American reporter, telling him, "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."
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
" was coined because of it and the term now refers to scams which pay early investors out of the investments of later investors. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.
Early life
Parts of Charles Ponzi's life are somewhat difficult to determine, owing to his propensity to fabricate and embellish facts. He was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Lugo in 1882. He told The New York Times that he had come from a well-to-do family in Parma, Italy. He took a job as a postal worker early on, but soon was accepted into the University of Rome La SapienzaUniversity of Rome La Sapienza
The Sapienza University of Rome, officially Sapienza – Università di Roma, formerly known as Università degli studi di Roma "La Sapienza", is a coeducational, autonomous state university in Rome, Italy...
. His friends considered the university a "four-year vacation," and he was inclined to follow them around to bars, cafés, and the opera.
Arrival in America
On November 15, 1903, he arrived in Boston aboard the S.S. Vancouver. By his own account, Ponzi had $2.50 in his pocket, having gambled away the rest of his life savings during the voyage. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," he later told The New York TimesThe New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.
Montreal
Montreal is a city in Canada. It is the largest city in the province of Quebec, the second-largest city in Canada and the seventh largest in North America...
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% interest on bank deposits – double the going rate at the time – and was growing rapidly as a result. Ponzi eventually rose to bank manager. However, he found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank 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. As Ponzi was penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer Canadian Warehousing and, finding no one there, wrote himself a check for $423.58 in a checkbook he found, forging the signature of a director of the company, Damien Fournier. 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 the prison St. Vincent-de-Paul near Montreal. 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.
After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison
United States Penitentiary, Atlanta
United States Penitentiary, Atlanta is a medium-security federal prison for men in Atlanta, Georgia. It also has a detention center for pre-trial and holdover inmates and an adjacent camp for minimum security male inmates...
. Here he became a translator for the warden, who was intercepting letters from mobster Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo. However it was another prisoner who became a true role model to Ponzi: Charles W. Morse
Charles W. Morse
Charles Wyman Morse was a notorious businessman and speculator on Wall Street in the early 20th century.-Early life:...
. Morse, a wealthy Wall Street businessman and speculator, fooled doctors during medical exams, poisoning himself by eating soap shavings, toxins that left his body as quickly as the doctors left his bedside. Morse was soon released from prison. Ponzi completed his prison term the summer following Morse's release, having an additional month added to his term due to his inability to pay a $500 fine.
Origin of the term "Ponzi scheme"
After Ponzi's release from prison, he made his way back to Boston. There he met Rose Maria Gnecco, a stenographer, whom he asked to marry. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. Nonetheless, she married him in 1918. For the next few months, he worked at a number of businesses, including his father-in-law's grocery, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses. Ponzi was unable to sell this idea to businesses, 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 an international reply coupon
International reply coupon
An international reply coupon is a coupon that can be exchanged for one or more postage stamps representing the minimum postage for an unregistered priority airmail letter of up to twenty grams sent to another Universal Postal Union member country...
(IRC), something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money.
The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.
Seeing an opportunity, Ponzi quit his translator's job to set his scheme in motion. He borrowed money and sent it back to relatives in Italy with instructions to buy postal coupons and send them to him. However, when he tried to redeem them, he ran into an avalanche of red tape
Red tape
Red tape is excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic and hinders or prevents action or decision-making...
.
Undaunted, Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.
Soon afterward, Ponzi started his own company, the "Securities Exchange Company," to promote the scheme. He set up shop in a building on School Street
School Street
School Street is a short but significant street in the center of Boston, Massachusetts. It is so named for being the site of the first public school in the United States...
. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).
He began depositing the money in the Hanover Trust Bank of Boston (a small bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he did, in fact, buy a controlling interest in the bank (through himself and several friends) after depositing $3 million. By July 1920, he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.
Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts, with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner. She died soon afterward.
Suspicion
Ponzi's rapid rise naturally drew suspicion. However, when a Boston financial writer suggested there was no way Ponzi could legally deliver such high returns in a short period of time, Ponzi sued for libel and won $500,000 in damages. As libel law in those days placed the burden of proof on the writer and the paper, this effectively neutralised any serious probes into his dealings for some time.Nonetheless, there were still signs of his eventual ruin. Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued 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 penniless 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 and the run stopped. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi's good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The next business day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.
Despite this reprieve, Post acting publisher Richard Grozier and city editor Eddie Dunn were suspicious and assigned investigative reporters to check Ponzi out. He was also under investigation by the Commonwealth of Massachusetts, and on the day the Post printed its article, Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation, a fortunate choice, as proper records were not being kept. Ponzi's offer temporarily calmed the suspicions of the state officials.
Collapse of the scheme
By this time, Ponzi was seeking another deal to get him out of trouble, 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'sBarron's Magazine
Barron's is an American weekly newspaper covering U.S. financial information, market developments, and relevant statistics. Each issue provides a wrap-up of the previous week's market activity, news reports, and an informative outlook on the week to come....
financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not 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 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.
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. However, this attracted the attention of Daniel Gallagher, the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company's books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors' names.
In the meantime, Ponzi had hired a publicity agent, William McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He later described Ponzi as a "financial idiot" who did not seem to know how to add.
The dénouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.
However, trouble came from an unexpected quarter—Massachusetts Bank Commissioner Joseph Allen. An initial investigation into Ponzi's banking practices found nothing illegal, but Allen was afraid that if massive withdrawals exhausted Ponzi's reserves, it would bring Boston's banking system to its knees. When Allen found out a large number of Ponzi-controlled accounts had received more than $250,000 in loans, he ordered two bank examiners to keep an eye on Ponzi's accounts. On August 9, they reported that enough investors had cashed their checks on Ponzi's main account there that it was almost certainly overdrawn. Allen then ordered Hanover Trust not to pay out any more checks from Ponzi's main account. He also orchestrated an involuntary bankruptcy filing by several small Ponzi investors. The move forced Massachusetts Attorney General J. Weston Allen
J. Weston Allen
John Weston Allen was an American politician who served as a member of the Massachusetts House of Representatives from 1915–1918 and as Massachusetts Attorney General from 1920–1923.As Attorney General, Allen was aggressive in his pursuit of white collar criminals...
to release a statement that there was little to support Ponzi's claims of large-scale dealings in postal coupons. State officials then invited Ponzi note holders to come to the Massachusetts State House to furnish their names and addresses for the purpose of the investigation. On the same day, Ponzi received a preview of Pride's audit, which revealed Ponzi was at least $7 million in debt.
On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi's scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi's last-ditch plan to "borrow" funds from the bank vaults after all other efforts to obtain funds failed.
With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.
Magnitude of Losses
The news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. His investors lost about 20 million in 1920 dollars (225 million in 2011 dollars); as a comparison, Bernie Madoff's similar scheme that collapsed in 2008 cost his investors about 10 billion dollars, 40 times the losses of Charles Ponzi's scheme. The Post won a Pulitzer PrizePulitzer Prize
The Pulitzer Prize is a U.S. award for achievements in newspaper and online journalism, literature and musical composition. It was established by American publisher Joseph Pulitzer and is administered by Columbia University in New York City...
in 1921 for its exposure of Ponzi's fraud.
Prison and later life
In two federal indictments, Ponzi was charged with 86 counts of mail fraud. At the urging of his wife, on November 1, 1920, Ponzi pleaded guilty to a single count before Judge Clarence Hale, who declared before sentencing, "Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel's admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out ... without receiving substantial punishment." He was sentenced to five years in federal prison.He was released after three and a half years and was almost immediately indicted on 22 Massachusetts state charges of larceny
Larceny
Larceny is a crime involving the wrongful acquisition of the personal property of another person. It was an offence under the common law of England and became an offence in jurisdictions which incorporated the common law of England into their own law. It has been abolished in England and Wales,...
. This came as a surprise to Ponzi; he thought he had a deal calling for the state to drop any charges against him if he pleaded guilty to the federal charges. He sued, claiming that as a federal prisoner he could not be tried by the state. The case, Ponzi v. Fessenden, made it all the way to the Supreme Court of the United States. On the 27th of March, 1922, the Supreme Court ruled that plea bargains on federal charges have no standing regarding state charges. It also ruled that Ponzi was not facing double jeopardy because Massachusetts was charging him with larceny while the federal government charged him with mail fraud (even though the charges implicated the same criminal operation).
In October 1922, he was tried on the first ten larceny counts. Since he was insolvent, Ponzi served as his own attorney and, being as persuasive as he had been with his duped investors, the jury found him not guilty on all charges. He was tried a second time on five of the remaining charges, and the jury deadlocked. Ponzi was found guilty at a third trial, and was sentenced to an additional seven to nine years in prison as "a common and notorious thief."
After word got out that Ponzi had never obtained American citizenship (despite having lived in the United States for most of the time since 1903), federal officials initiated efforts to have him deported as an undesirable alien in 1922.
Ponzi was released on bail as he appealed the state conviction. He went to the Springfield neighborhood of Jacksonville, Florida and launched the Charpon Land Syndicate ("Charpon" is an amalgam of his name), offering investors in September 1925 tiny tracts of land, some under water, and promising 200 percent returns in 60 days. In reality, it was a scam that sold swampland in Columbia County
Columbia County, Florida
Columbia County is a county located in the U.S. state of Florida. As of 2000, the population was 56,513. The U.S. Census Bureau 2005 estimate for the county is 64,040 . Its county seat is Lake City, Florida....
. Ponzi was indicted by a Duval County grand jury in February 1926 and charged with violating Florida trust and securities laws. A jury found him guilty on the securities charges, and the judge sentenced him to a year in the Florida State Prison. Ponzi appealed his conviction and was freed after posting a $1,500 bond.
Ponzi traveled to Tampa
Tampa, Florida
Tampa is a city in the U.S. state of Florida. It serves as the county seat for Hillsborough County. Tampa is located on the west coast of Florida. The population of Tampa in 2010 was 335,709....
, where he shaved his head, grew a moustache, and tried to flee the country as a crewman on a merchant ship bound for Italy. The ship, however, made one last American port call; he was caught in New Orleans and sent back to Massachusetts to serve out his prison term. Ponzi served seven more years in prison.
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 managed to untangle it and could conclude only that millions had gone through his hands.
Ponzi was released in 1934. With the release came an immediate order to have him deported to Italy. He asked for a full pardon from Governor Joseph B. Ely
Joseph B. Ely
Joseph Buell Ely was the 52nd Governor of the U.S. state of Massachusetts.Born in Westfield, Massachusetts, Joseph B. Ely graduated from Williams College in 1902, before earning a degree from Harvard Law School in 1905. He returned to Westfield and practiced law as a partner of Ely & Ely and...
. However, on July 13, Ely turned the appeal down. His charismatic confidence had faded, 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 in 1937, as she did not want to leave Boston. Rose, who later remarried, eventually became the bookkeeper for the New Cocoanut Grove Inc, the parent company of Boston's Cocoanut Grove
Cocoanut Grove fire
The Cocoanut Grove was Boston's premier nightclub during the post-Prohibition 1930s and 40s. On November 28, 1942, occurred the scene of what remains the deadliest nightclub fire, killing 492 people and injuring hundreds more...
nightclub.
In Italy, Ponzi jumped from scheme to scheme, but little came of them. He eventually got a job in Brazil as an agent for Ala Littoria
Ala Littoria
Ala Littoria was the Italian national airline that operated during the 1930s and 1940s.- History :Ala Littoria was formed by a merger of Società Aerea Mediterranea , Società Anonima Navigazione Aerea , Società Italiana Servizi Aerei and Aero Espresso Italiana in 1934...
, the Italian state airline. During World War II, however, Brazil sided with the Allies, and the airline's operation in the country was shut down. During that time, Ponzi also wrote his autobiography.
Death
Ponzi spent the last years of his life in poverty, working occasionally as a translator. His health suffered. A heart attack in 1941 left him considerably weakened. His eyesight began failing, and by 1948, he was almost completely blind. A brain hemorrhage paralyzed his right leg and arm. He died in a charity hospital in Rio de Janeiro, the Hospital São Francisco de Assis of Federal University of Rio de Janeiro on January 18, 1949.Supported by his last and only friend who spoke English and had notions of Italian, the barber Francisco Nonato Nunes, was how Mr. Ponzi granted one last interview to an American reporter, telling him, "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."
Further reading
- The History Channel. "In Search of History: Mr. Ponzi and His Scheme". February 9, 2000. (AAE-42325, ISBN 0767016726)