The Ponzi Express

Exposing the dangers of the Online Ponzi.

Sunday, January 29, 2006

The Original Ponzi

Charles K. Ponzi. Google it. This is the name of the man who made the "get-rich-quick" scheme infamous. Charles Ponzi is just one of his aliases. Variants of the name include Charles Ponei, Charles P. Bianchi, and Carlo/Carl.

Little is known about Charles Ponzi's childhood, nor do we really care. What we do care about is what he did that made the name Ponzi synonymous with scam artist.
An Italian immigrant, Ponzi came to America in 1903 to make his fortune. Small in stature, he more than made up for it with his larger-than-life personality.

So, what was Ponzi selling? Well, it was international postal reply coupons (IPRCs). Ponzi noticed that the IPRC he received from Italy was worth 1 cent in Italy, but about 6 cents in the USA. The grand idea was, that he would buy large quantities of international postal reply coupons in countries with weak economies (remember that this was just a few years after World War I and Europe was still recovering), and sell them to a third party at a favourable exchange rate, and then exchange it back into US dollars. Ponzi claimed that the net profit from all this dealings would be in excess of 400% of investment.

However, he neglected to mention a few details. Bureaucracy and red tape would slow down the various exchange processes. Currency exchange (especially in the large quantities proposed) took time. Even with the best of scenarios, it would earn nowhere near that 400% claim.

So, Ponzi set up a company called the Security Exchange Company (a very official sounding name) and offered a profit of 50% in 90 days. He however claimed that he would be able to deliver that 50% in 45 days, meaning that someone could potentially double his money in 90 days! The news spread quickly, as people started throwing more money into the 'venture'.

This phenomenal growth rate attracted the curious eyes of the media... and the law.
The walls came crashing down, after The Boston Post (in July 26, 1920) published a front page article questioning the legitimacy of the Ponzi business/scheme. Investors flocked to his door, demanding a refund. Initial worries were allayed, with those demanding refunds getting their money back - almost 1000 claims were settled that day (those were the lucky ones, IMHO). In fact, Ponzi even allowed auditors to come in to check his books!

Public support grew, and some even suggested that Ponzi should enter politics (LOL). Ponzi continued to dream, envisioning bigger and better things to come.

The scheme eventually collapsed on August 10 1920. Auditors, banks and the media declared that Ponzi was bankrupt. Ponzi's criminal past was brought to light - forgery, smuggling, jail time. The authorities finally arrested Ponzi on August 13th.

This wasn't the end of the story. Lawsuits, criminal proceedings, and various court trials followed. Five banks eventually closed down (the ones which Ponzi had used).
Thousands of people lost their money, getting back only a fraction of their investment after legal action.

Ponzi fooled thousands into believing, and for a while at least, he was a millionaire (and a hero of sorts). At the height of popularity, the scheme was pulling in $1 million a week! In total, there were about 40,000 investors and $15 million (worth about $140 million in today's dollar) in invested money.

So, what happened to Charles Ponzi? Well, he was sentenced to 5 years in federal prison, and a further 7-9 years by Massachusetts authorities. Released on a $14,000 bond, pending an appeal, Ponzi disappeared. But not for long. The following years were filled with scam after scam, jail after jail. Eventually, he was deported to Italy in 1934. None of his later works/schemes would compare to the 1920 scheme.

Ponzi died in 1949, with just enough money to cover the costs of burial. A fitting end to one of the world's most famous con artists.

I will always think of Ponzi, not only as an opportunist ever willing to exploit human greed, but also as an innovator and risk taker. He was constantly thinking up new ways to make money (albeit illegally), but that is the spark that we see in all the top businessmen in the world.

Sources:
Wikipedia [2]
Crimes of Persuasion
US Securities and Exchange Commission (SEC)
Goldhaven.com
Mark Knutsen's Charles K. Ponzi Website
Useless Information
What is a Ponzi?
Pyramid Schemes, Ponzi Schemes, and Related Frauds
Pyramid Schemes (U.S. FTC)
History and Nature of Ponzi Schemes

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