THE CON: Charles Ponzi promised to double investors' money in three months with postal coupons, which he’d buy from a country with weak currency and redeem for twice as much in dollars. But there were no coupons – only the funds from new investors, which he used to pay off the earlier ones.
THE DAMAGE: $8 million, or about $100 million today
THE OUTCOME: Despite attempts to escape on a steamer ship and convince the president to extradite him to Italy, Ponzi served seven years in prison. His name became shorthand for the classic “robbing Peter to pay Paul” scheme.
In December of 1919, Charles Ponzi sold the people of Boston on a plan to make a quick and easy buck. Within six months, he had thousands of investors who cared less about the mechanics of his business than the prospect of doubling their money. To fulfill his promise, Ponzi shuffled the money that poured into his Boston office – more than $2 million a week at one point - from his most recent to his earlier investors. Today, the most famous of all cons, the “robbing Peter to pay Paul scheme,” is known as a Ponzi scheme.
At 21, Ponzi arrived in the U.S. from Italy expecting to find streets paved with gold. Instead, he struggled to find steady work in Pittsburgh. He headed north to Montreal and landed a job as the manager of an Italian bank. Before long, he found himself unemployed and under suspicion of the Canadian police. It turned out the owner of his bank had pocketed the money that immigrant depositors intended to send home. With no evidence linking him to the fraud, Ponzi could have escaped trouble. But in his desperation to flee Canada, he got caught forging a check. He served three years in prison and then crossed the border with five other Italians. Charged with smuggling aliens into the U.S., Ponzi found himself back behind bars.
After his release, Ponzi married and settled in Boston. Determined to make a fortune, he saw opportunity in International Reply Coupons – receipts with a fixed value in any currency that could be redeemed for stamps. Created in 1906, the coupons had not been adjusted to reflect the devalued currency experienced by some countries after World War I. Ponzi figured he could buy coupons in countries like Italy and redeem them in the U.S. for cash. To launch his Securities Exchange Company, Ponzi created certificates that looked similar to the coupons themselves.*
Ponzi may have started off thinking he could run a legal business; but soon realized it wouldn’t work. In response to an inquiry, postal officials informed him that the coupons could not be redeemed for cash. But it was too late. People literally lined up to invest in the Securities Exchange Company. Some investors, including several Boston policemen, earned an extra 10 percent by working as “sales agents” who brought in other investors. Within ethnic neighborhoods, churches and workplaces, word spread fast of a man who could make money multiply. Some people were so charmed by Ponzi, and confident in his ability to make them rich, they chose to reinvest their earnings. “I admit that I started a small snowball downhill,” Ponzi said after his arrest. “But it developed into an avalanche by itself.”
Six months in, that avalanche was moving at full force. In June, the Securities Exchange Company took in $2.5 million from 7,800 clients. Ponzi – dubbed the “wizard” by the press that he courted– enjoyed his status as a newly minted millionaire. He brought his mother over from Italy and moved to a mansion in the suburbs. He wore silk shirts and carried a gold-tipped cane.
Ponzi also enjoyed the adoration of his eager investors. Even as headline stories in The Boston Post doubted his company’s legitimacy and declared him insolvent, Ponzi arrived at his office every morning to a cheering crowd. Rather than cower as investigators and reporters closed in around him, Ponzi focused on feeding the popular myth about him. He gave countless interviews, where he told his rags-to-riches story, denied the charges against him and declined to explain precisely how he exchanged postal coupons for dollars.
Meanwhile, with a thorough audit and investigation underway, the Securities Exchange Company stopped accepting deposits. With no fresh funds – and thousands of people looking to cash their certificates – Ponzi had a problem. In one day, he paid out as much as $400,000. His money, and the time to come up with more, was running out. The Boston Post, which later awarded a Pulitzer Prize for its reporting on the scandal, ran stories detailing his prior convictions and quoting postmast
ers who claimed there weren’t enough coupons in the world for his scheme to work.
The inevitable arrest, and media circus of a trial, ended with a guilty verdict. Released after four years in federal prison, Ponzi was sentenced to an additional 7 to 9 years in state prison in 1924. Desperate to avoid another stint behind bars, Ponzi took off for Florida. He adopted a disguise and fake name and – after faking his suicide - boarded a ship bound for Texas. He might have escaped but he couldn’t keep his mouth shut. He revealed his identity to a fellow waiter on the ship and was arrested. In a final bid for freedom, Ponzi sent a telegram to President Calvin Coolidge asking to be deported. His wish was not granted until he finished his seven year sentence. In 1939, a few years after his release, he left Italy once again for Rio de Janeiro. He ran a rooming house and taught English until his death in 1949.
Con Timeline: 1919-1924
