In 1920, Italian immigrant Charles Ponzi seemed to be living the American Dream and making it easily available to others willing to invest in his business. However, his get-rich-quick scheme turned out to be a fraud. He himself later died nearly penniless after serving prison sentences and being deported for his crimes, and his name became synonymous with the type of swindle he orchestrated.
In late 1919, Charles Ponzi found the idea that would bring him the fortune that he had long dreamed about and thought was his for the taking when he arrived in the United States from Italy in 1903. Lacking the means to finance his idea himself, he set out to attract investors to his latest business venture, which he promoted under the name the Securities Exchange Company. The business would turn out to be a fraud.
Charles Ponzi.
With the promise of 50 percent interest in forty-five days, money from investors slowly began to come in to Ponzi’s company. As people began to hear that initial investors had actually received the promised 50 percent interest, Ponzi attracted increasingly more investors and their money. By the end of July, 1920, investors had entrusted him with nearly ten million dollars. What the investors did not realize was that Ponzi was using the money from new investors to pay off the obligations to those who had previously invested.
The business that Ponzi purported to be conducting involved international reply coupons. In 1906, the Universal Postal Union, the international organization responsible for setting policy regarding the transfer of mail among countries, introduced the international reply coupon as a means to send return postage to a person in another country. The coupons could be bought in the post office of one country and redeemed in another country for postage stamps of the recipient country. Popular among immigrants, the coupons allowed many to keep in touch with less affluent friends and relatives in their home countries, who were otherwise reluctant to pay the cost of a postage stamp.
Ponzi discovered in 1919 that the value of coupons in some countries differed from their value in the United States. He found that he could send a U.S. dollar to Italy, exchange it for Italian lira to buy international reply coupons, send the coupons to the United States, and redeem them for more than one dollar’s worth of stamps. The difference came about as a result of the devaluation of many European currencies caused by the effects of World
With an idea that seemed plausible, Ponzi set out to find investors. He quickly discovered that agents could better sell his idea to a wider audience. With the promise of a 10 percent commission on all investor money solicited, Ponzi’s first sales agent, Ettore Giberti, a grocer from a Boston suburb, had by early January, 1920, sold the idea to eighteen investors, who entrusted him with $1,770. Each month, Ponzi saw an increase in the number of new investors and new agents willing to sell his idea. In February new investments totaled $5,290 from seventeen investors. In June, the total was more than $2.5 million from seventy-eight hundred investors, and in July, the last month of operation, total new money was nearly $6.5 million from more than twenty thousand investors.
While many of the investors chose to reinvest their money after their initial investments matured, Ponzi made attempts to find some means to make his business legitimate after it became obvious to him that it was not possible to actually profit from reply coupons. He soon found that the money generated from his enterprise had a destabilizing impact on some of the smaller banks in Boston as a result of withdrawals made by his investors and the large balances that he held in them, which he could threaten to withdraw. He managed to take control of one bank, the Hanover Trust Company, and thought he could profit by gaining control of other weakened banks. He also developed a scheme, which never materialized, which involved buying from the U.S. government for $200 million a fleet of surplus passenger and freight ships that had been built during World War I and selling stock in the two companies that would own and operate the fleet.
Although never at a loss for investment ideas, and ever-optimistic that he would find a way to pay off investors, Ponzi was beginning to run out of time to implement his ideas. At the beginning of July, 1920, a furniture dealer named Joseph Daniels sued Ponzi for one million dollars, claiming that a loan he had made to Ponzi in December entitled him to part of Ponzi’s profits in the international reply coupon venture. While his claim was baseless, it did cause the Boston Post, under acting publisher Richard Grozier, to begin investigating Ponzi’s business.
Postal and law enforcement authorities already had taken note of Ponzi’s activities but failed to find anything illegal. However, interviews with Clarence Barron, a renowned financial authority and founder of Barron’s Weekly, about Ponzi’s operation for a July 25 article in the Boston Post. Barron suggested that the business was a fraud, which Ponzi strongly denied. With the allegations made public, federal, state, and local authorities were forced to investigate. On July 26, in an effort to deflect criticism, Ponzi offered investigators the opportunity to audit his business, during which he would close it to new investors. Ponzi saw the audit as a way of proving that his business was solvent. He planned to claim assets from his bank, the Hanover Trust, as his own to prove that he could pay off all his obligations.
Ponzi’s plan, however, ran into a number of obstacles. The allegations that his business was a fraud caused investors to return in droves and demand their money back. Ponzi initially saw this as a benefit because money that was refunded before forty-five days did not receive any of the promised interest and thereby reduced his indebtedness. As the investor-run continued, though, he feared that he would run out of money before the audit was completed and before he could “prove” he was solvent. Bank commissioner Joseph C. Allen forced the issue on August 9 when he ordered the Hanover Trust to stop honoring Ponzi’s checks. Although Ponzi still had money available, his main account with the bank was overdrawn, and Allen, who had been investigating Ponzi, saw this as an opportunity to close down Ponzi’s enterprise. Later in the same week, the bank commissioner took control of the Hanover Trust, which eliminated any possibility that Ponzi could prove that he was solvent. This coincided with an article published by the Boston Post detailing Ponzi’s connection with a failed bank in Montreal and his prison record in Canada for forgery. By August 12, the results of the audit revealed that his obligations exceeded his assets by about three million dollars. Ponzi’s bubble had burst.
In addition to the Hanover Trust, several other banks in the Boston area with ties to Ponzi failed as a result of runs caused by depositors’ fears. Investors who had not collected on their investments before Ponzi’s business was closed received about 37 cents for each dollar they had invested.
Ponzi served several years in federal prison for his crime and, after a brief period of freedom, another few years in state prison. He then was deported to Italy in 1934. The Boston Post won a Pulitzer Prize for public service in 1921 for exposing Ponzi as a fraud.
Ponzi’s story did not end with his fall. His success spawned countless imitators who profited throughout the 1920’s. In the years since his death in the charity ward of a hospital in Rio de Janeiro, Brazil, with less than one hundred dollars in his name, many investment opportunities that have seemed too good to be true have turned out to be swindles, much like those perpetuated by Ponzi. While Ponzi did not invent this type of fraud, he gave it such notoriety that it has come to be called a Ponzi scheme.
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Dunn, Donald H. Ponzi: The Incredible True Story of the King of Financial Cons. New York: Broadway Books, 2004. Provides an overview of and insight into Ponzi’s life presented in a novelistic way. Details the events of the Securities Exchange Company. This reprint includes the author’s interview with Ponzi’s wife before her death. -
Ponzi, Charles. The Rise of Mr. Ponzi. Naples, Fla.: Inkwell, 2001. Autobiography, first published in 1937, which displays the arrogance and optimism of Ponzi in his own words as he discusses the events that led to his rise and fall. -
Russell, Francis. “Bubble, Bubble—No Toil, No Trouble.” American Heritage 24 (February, 1973): 74-80. Provides a historian’s perspective on Ponzi’s impact on Boston. Examines both political and social tensions related to Ponzi’s rise and fall. Includes several photographs and political cartoons reprinted from the Boston Post. -
Shapiro, Susan P. Wayward Capitalists: Target of the Securities and Exchange Commission. New Haven, Conn.: Yale University Press, 1984. Scholarly work provides detailed information on how the SEC, formed in 1934, partly as a result of Ponzi’s conviction, detects securities violations and prosecutes offenders. -
Zuckoff, Mitchell. Ponzi’s Scheme: The True Story of a Financial Legend. New York: Random House, 2005. Gives an extensively researched and interesting account of Ponzi’s life, his scheme, and the individuals who eventually caused the demise of his business.
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