Ponzi in 1920
|Born||Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi
March 3, 1882
Lugo, Emilia-Romagna, Italy
|Died||January 18, 1949
Rio de Janeiro, Brazil
|Charge(s)||Forgery; Mail fraud (federal), larceny (state)|
|Penalty||3 Years 1908-1911; 5 years federal (served 3 and half years before facing state charge) 1920-1922; 9 years state 1927-1934; deportation|
|Parents||Roberto and Maria Ponzi|
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S. and Canada. His aliases include Charles Ponci, Carlo and Charles P. Bianchi. Born in Italy, he became known in the early 1920s as a swindler in North America for his money making scheme. 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. In reality, Ponzi was paying early investors using the investments of later investors. This type of scheme is now known as a "Ponzi scheme". 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 and understand, owing to his propensity to fabricate and embellish facts. He was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in Lugo, Italy 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 Sapienza. 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 $2.51 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 Times. 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. 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 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, to whom he proposed marriage. 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 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 the IRC 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 2010 dollars). By March, he had made $30,000 ($324,000 in 2010 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 others to invest. By May 1920, he had made $420,000 ($4.53 million in 2010 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 bought 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. This 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. On July 31, 1920, Ponzi told Father Pasquale Di Milla on the director of the Italian Children's Home in Jamaica Plain that he would donate $100,000 in honor of his mother.
Confederate War Veteran, Elmira Prison escapee, local hero and Augusta Georgia Accountant Berry Benson was too old to fight in World War I. To help the cause he learned about the plight of orphaned French children during World War I (1917-18), Benson "adopted" 5 of them and persuaded his friends to adopt 160 others. In exchanging dollars for francs during these proceedings he noticed that a person could buy francs cheaply in France and sell them at the official rate in the United States. In November 1919 he informed the U.S. attorney general that unscrupulous persons might take advantage of this discrepancy but was assured that such a thing would not happen. The following month, however, Carlos Ponzi, an Italian immigrant with a criminal record, began to exploit the difference in exchange rates by opening a bank in Boston, Massachusetts, and attracting millions of dollars from depositors hoping to get rich quickly. Benson learned of Ponzi's activity and alerted the Massachusetts attorney general. Augusta newspapers credited Benson for initiating the investigation, which led to the imprisonment of Ponzi. <Susan Williams Benson, ed., Edward J. Cashin, Augusta State University, "Berry Benson's Civil War Book: Memoirs of a Confederate Scout and Sharpshooter">
Ponzi's rapid rise naturally drew suspicion. 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 neutralized 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's 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.
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 major 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.
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 to 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 $18 billion, 53 times the losses of Ponzi's scheme.
Prison and later life 
In two federal indictments, Ponzi was charged with 86 counts of mail fraud, and faced a lifetime in jail. At the urging of his wife, Ponzi pleaded guilty on November 1, 1920 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, which 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 March 27, 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, and fled 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% 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 mustache, 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 the airline's operation in the country was shut down after the British intelligence services intervened and Brazil sided with the Allies. During that time, Ponzi also wrote his autobiography.
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, 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 Payment", TIME magazine, January 5, 1931, retrieved December 21, 2008, "In 1920 thousands of gullibles had a more ornate picture of him. He was then the shrewd, straight-eyed miracle man of Boston's Hanover Street. He promised his clients a 50% profit in 45 days. ... The essence of his scheme was to buy postal reply coupons in countries with depreciated exchange, redeem them at face value for U. S."
- "Take My Money!", TIME magazine, January 31, 1949, ISBN 0-256-08657-5, retrieved December 21, 2008, "In Italy, Ponzi got on the good side of Mussolini's Fascists, was sent to Rio de Janeiro as business manager for Italy's LATI airlines. The war ended his job; after that he eked out a meager existence as a translator. Committed to a Rio charity ward, blind in one eye and partly paralyzed, he said not long ago: "I guess the only news about me that most people want to hear is my death.""
- "In Ponzi We Trust", Smithsonian magazine, December 1998, retrieved December 21, 2008, "Ponzi himself was probably inspired by the remarkable success of William "520 percent" Miller, a young Brooklyn bookkeeper who in 1899 fleeced gullible investors to the tune of more than $1 million."
- Sobel 1968, p. 17.
- Bloodletters and Badmen: A Narrative Encyclopedia of American Criminals from the Pilgrims to the Present, by Jay Robert Nash
- "Ponzi Arrested.", New York Times, August 13, 1920, retrieved December 21, 2008, "Liabilities Put at $7,000,000. Federal Authorities Charge Using Mails to Defraud. State Warrant Charges Larceny. Claims $4,000,000 Assets. Bank Commissioner Fears Hanover Trust Assets Have Been Wiped Out. Investors Grow in Number. Attorney General Still Recording. Hundreds of Note Holders Caught in Crash. Liabilities running at least up to $7,000,000 and assets unknown, save for his assertion that they amount to $4,000,000, are among the echoes of the bursting of Charles Ponzi's bubble this noon, when he surrendered ..."
- Burnsed, Brian (2011 [last update]). "The Greatest Financial Scandals: Charles Ponzi - BusinessWeek". images.businessweek.com. Retrieved November 18, 2011.
- Levisohn, Ben (2011 [last update]). "How to Make a Madoff - BusinessWeek". businessweek.com. Retrieved November 18, 2011.
- Zuckoff, Mitchell (January 13, 2009), "What Madoff could learn from Ponzi", CNNMoney.com, retrieved April 15, 2009
- "Proceedings to Deport Coupon Financier to Canada or Italy Are Begun.", New York Times, November 30, 1924, retrieved December 21, 2008, "Charles Ponzi, promoter of the get-rich-quick scheme of four years ago which attracted investments of many millions of dollars, was arrested early today by immigration authorities on a warrant charging that he is in this country illegally. Deportation proceedings will begin immediately, it was said by Immigration Commissioner John P. Johnson."
- Florida Times-Union December 22, 2008-Ponzi lived here: Infamous name tied to scheme was local by Jessie Lynne Kerr
- "Ponzi Pardon Plea is Denied in Boston. Governor Ely Decision Is Followed by Court Move to Block Deportation.", New York Times, July 13, 1934, retrieved December 21, 2008, "Governor Ely today denied Charles Ponzi's petition for a full pardon, which would save him from deportation. The Governor made his decision after a hearing at the State House in which Ponzi pleaded tearfully to remain in this country."
- "Sued for Divorce", TIME magazine, July 6, 1936, 1937, retrieved December 21, 2008, "Charles Ponzi, 54, celebrated Boston swindler, now a Roman tourist guide; by Mrs. Rose Ponzi whom he married in 1918; in Cambridge, Mass. Grounds: he had served "more than five years" (1922-34) in prison. Explained she: "When he was down ... I stuck to him.""
- John C. Esposito, "Fire in the Grove", Da Capo Press, 2005
- Grove, Martin A. (February 13, 2004), "'Ponzi' Movie Isn't Dunn Deal Yet, But Could Be", The Hollywood Reporter, retrieved December 23, 2008
- Charles Ponzi, "The Rise of Mr. Ponzi", ca. 1937. Now in public domain.
- Scams – and how to protect yourself from them, ISBN 1-4092-3291-3, "... to an American reporter, and commented about the wild ride he had given Bostonians: "Even if they never got anything for it, it was cheap at that price. ..."
Further reading 
- Ponzi, Charles (1936), The Rise of Mr. Ponzi (Autobiography) (Public domain), ISBN 978-2-9538012-1-7
- Dunn, Donald (2004), Ponzi: The Incredible True Story of the King of Financial Cons (Library of Larceny) (Paperback), New York: Broadway, ISBN 0-7679-1499-6
- Zuckoff, Mitchell (2005), Ponzi's Scheme: The True Story of a Financial Legend, New York: Random House, ISBN 1-4000-6039-7
- The History Channel. "In Search of History: Mr. Ponzi and His Scheme". February 9, 2000. (AAE-42325, ISBN 0-7670-1672-6)
- Sobel, Robert (1968), The Great Bull Market: Wall Street in the 1920's, New York: Norton, ISBN 0-393-09817-6
- Kalbfleisch, John (2009), Ponzi scheme: the Montreal link., Montréal: The Gazette