Received an A- on this paper, United States History, DePaul University, put almost twenty hours into, most I write in four-five hours, very proud of this piece. Throughout history, the swindler has financially plagued society. Whether it is the get rich quick scheme or the carnival workers impossible challenge, people have been cheated out of uncountable sums of money. In the 1920s a man named Victor Ludsig, posing as a French official, sold the Eiffel Tower to a gullible scrap ironworker for $50,000. Even today con artists are thriving using the Internet to borrow from Peter to pay Paul.
This is a scheme made famous by a crook so successful that his name now graces the age-old fraud, the Ponzi scheme. Websters Dictionary defines Ponzi Scheme as Any investment program that offers impossibly high returns and pays these returns to early investors out of the capital contributed by later investors. Named for Carlo Ponzi who promoted such a scheme in the 1920s based on a theoretical arbitrage in international postal reply coupons. Fifty percent profit in forty-five days! was the claim of Charles Ponzi. Ponzi was a purported financial wizard.
In the summer of 1920, he ran an investment company in Boston. He claimed to reap great profits by trading postal reply coupons. Nonetheless, the investment scheme was a fraud. Ponzi was using investors’ money to pay off earlier investors, while keeping some for himself. In the end, he had collected $9,500,000 from 10,000 investors. Charles Ponzi was born in Italy in 1882. Born to a wealthy family, Ponzi put off work as long as possible and attended college at the University of Rome. Knowing he was avoiding the inevitable and seeing no appeal in the Italian business world, he immigrated to the United States.
In 1903, upon entering the United States at the age of 21, Ponzi proceeded into Canada. In 1909, he was convicted of forgery in events surrounding the collapse of the Montreal banking firm of Zrossi & Co. , of which he was a member. As punishment, he was sentenced to a three-year term in the St. Vincent De Paul Penitentiary in Montreal. Released from Canadian Prison after only twenty months for good behavior, Ponzi entered the United States again on July 30, 1910. Within ten days of his release, he violated immigration laws by illegally bringing five Italians over the border from Canada.
For this offense, he served two years in Atlanta, Georgia. After his release from the Atlanta prison he made his way to Boston and toiled in relative obscurity until he developed a postal reply coupon scheme and formed the Securities Exchange Company. Since colonization, Boston had been infested with so called entrepreneurs seeking to interest small investors by promising big profits. High wages in industrial centers, the climbing cost of living, and below-par quotations on Liberty Bonds, helped make New England a fertile field for those who promised quick and big returns.
Many agents found their best argument was that while old banking houses made small returns to their depositors, the banks themselves were able to make enormous profits by frequently turning over their depositors money. Some agents proposed that small investors share in these big profits by permitting their savings to be invested for them. Ponzi adopted from contemporaries the notion of sharing enormous profits with investors, adding his own twist: trade in postal reply coupons. This idea, the keystone of his swindle, was made more plausible with tales he spun about how he received the brilliant inspiration.
On one occasion he said that in August of 1919, when he was considering issuing an export magazine: I wrote a man in Spain regarding the proposed magazine and in reply received an international exchange coupon which I was to exchange for American postage stamps with which to send a copy of the publication. The coupon in Spain cost the equivalent of about one-cent in American money, I got six cents in stamps for the coupon here. Then I investigated the rates of exchange in other countries. I tried it in a small way first. It worked. The first month $1,000 became $15,000.
I began letting in my friends. First, I accepted deposits on my note, payable in ninety days, for $150 for each $100 received. Though promised in ninety days I have been paying in forty-five days. Ponzi opened his postal coupon business in December of 1919. He filed a certificate with the city clerk citing himself as sole manager of The Securities Exchange Company. In the beginning of the enterprise, Ponzi described himself as everything from President to office boy. On the second day of operation, he explained his business to a visitor from the Chamber of Commerce.
The man believed Ponzi’s enterprise could succeed. A short time later the postal inspector stopped by and expressed doubts about the legality of redeeming millions of coupons. Ponzi claimed that having the coupons redeemed overseas, outside of the federal governments jurisdiction solved this problem. In May 1906, the United States and over 60 other countries assembled in Rome, and revised the Universal Postal Convention of 1897. The UPC provided for the administration of postal services among signatory countries.
Ponzi seized upon the mechanism provided by Article 11(2) of the revised Convention. Article 11(2) is as follows: Reply coupons can be exchanged between the countries of which the Administrations have agreed to participate in such exchange. The minimum selling price of a reply coupon is 28 centimes, or the equivalent of this sum in the money of the country which sells it. This coupon is exchangeable in all countries parties to the arrangement for a postage stamp of 25 centimes or the equivalent of that sum in the money of the country where the exchange is requested.
The Detailed Regulations contemplated in Article 20 of the Convention determine the conditions of this exchange, and in particular the intervention of the International Bureau in manufacturing, supplying, and accounting for the coupons. This provision, with a built-in 3-centime loss on the sale of each coupon (a centime being a hundredth of a franc). Clearly, this did not makeway for profitable arbitrage through these coupons. The purpose of the reply coupon was simply to facilitate the prepayment of return postage when sending mail to another country.
The recipient of a reply coupon would exchange the coupon for the appropriate stamp in the recipient’s country, such stamp not being available in the sender’s country. The value of the coupon was intended to be constant throughout all countries forming the Postal Union, and regulations defined the rate of exchange between each countrys currency and postal reply coupons. Because of economic dislocations caused by World War I, however, some currencies became devalued relative to others, and the postal regulations had not been updated to reflect this.
For instance, Ponzi claimed The same amount of American money will buy more value in coupons in Bulgaria in than in the United States. There did seem to be potential for profit here, and although the aggregate volume of coupon redemption did not indicate abnormal trading activity, postal authorities took steps to prevent speculation. On July 2, 1920, the Post Office Department issued regulations limiting redemption of coupons to ten at one time. The Post Office Department announced new conversion rates on July 28, to be effective August 15. Prior to this, the rates had not been changed since before the war.
With characteristic government candor, postal officials denied that the changes were the result of concerns about speculation in reply coupons. Acting Third Assistant Postmaster General Barrows noted foreign countries had also taken steps to prevent speculation. Regardless, these measures did not hamper Ponzi’s operations, as he was not trading in coupons anyway. The flaw in a coupon trading scheme as Ponzi proposed was that while an individual stamp transaction may indeed yield a 400 percent profit, the amount of that profit would be minuscule in absolute terms.
In order to earn the millions of dollars, astronomical quantities of coupons would have to be handled. One can imagine hordes of Ponzi agents, pushing wheelbarrows full of coupons to post offices, unloading them with shovels or pitchforks. Intuitively, we can see that the transaction costs of purchasing, transporting and redeeming the coupons would exceed any profits from sale, and it is conceivable that Ponzi actually made some trades early on and discovered this fact.
Ponzi recognized that the problem of handling large volumes of coupons was a matter of concern to investors and authorities, incorporating this into the mystique of his scheme: My secret is How do I cash the coupons? That is what I do not tell. Ponzi started his business essentially penniless, and in December of 1920, he borrowed two hundred dollars from Joseph Daniels, a furniture dealer. Ponzi used most of the money to purchase furniture from Mr. Daniels, keeping the rest for spending money. Ponzi paid the note at maturity.
Although Ponzi knew the idea would never work, through his charisma and charm people began to invest in his postal reply coupon scheme. He happily accepted money from anyone willing. He even accepted eight hundred dollars from his wife Rose. By March 1920, nearly one hundred people had invested almost $30,000. Nonetheless, Ponzi owed these investors nearly $45,000. Fortunately for Ponzi, when the notes came due, most depositors kept the money invested to accrue even more interest. At first, most of Ponzis clients were Italian immigrants, but as the good word spread, many others rapidly joined the growing crowds.
Policemen, priests, working class mothers with children, and fathers who mortgaged their homes all invested with Ponzi. Shortly thereafter, word spread throughout New England and Ponzi hired agents to operate and accept money throughout the central East Coast. The smooth and selfish Ponzi had ready answers for every question or doubt. The effervescent Ponzi was able to convince anyone with his sappy chatter. He had not studied finance, yet he had a natural skill in mathematics and had supreme confidence.
Ponzi believed that if you overwhelm someone with enough numbers they would at least think you know what you are talking about. As torrents of money flowed daily into the SEC, Ponzi adjusted to his stunning success. He first expanded his office and hired people to stand behind the cages and accept money. Then within a few days, he hired managers. By that time money was flowing in at such a massive rate that he also hired two Boston Policemen. Every few hours, one of the policemen would carry out a satchel to the bank. By May 1920, one thousand investors had bought nearly $400,000 of SEC notes.
The summer of 1920 was sweltering and it was even hotter due to Charles Ponzi and his perceived financial wizardry. Immigrants from all over the East Coast joined the Bostonians in coughing up millions of dollars to double their money in three months by investing in Ponzis postal reply coupon scheme. With income from his venture growing exponentially, Ponzi invested in the good life for himself. He bought a $500,000 home outside of Boston with central heat and air conditioning and a heated swimming pool. He also spent nearly the equivalent of the cost of his home on furnishings.
Ponzi also brought his mother, Emelda, over from Italy via first class ocean liner, donated $100,000 to a local orphanage, and hired a publicity agent, William McMasters, to help with handling the onslaught of notoriety. Ponzi, out for revenge, even bought the Poole Shipping company where he once worked solely to fire his former boss. Nevertheless, with every dollar he brought in, the mountain of debt he owed his investors kept growing. The crowds outside Ponzis school street office caught curious officials attention. Three policemen came to question the legitimacy of Ponzi.
When the officers left, two of them had invested with Ponzi. Six months earlier the Italian was flat broke, now, Charles Ponzi, was basking in his newly found prosperity and notoriety, swarmed by crowds wherever he went. In the Italian neighborhoods he was a god, he was the image of everything they had wished to achieve. In addition, their investment was growing immensely. He was idolized. The first question involving Ponzis financial armor arose when J. R. Daniels, the furniture dealer who had helped start Ponzis business sued him for $1. 5 million.
This brought attention to the fact that Ponzi was occupying this small office with rented furniture, yet he has all these millions of dollars. An article about the issue in The Boston Post brought a swift reaction. People began withdrawing from the SEC. Ponzi alleviated this problem by simply giving the appropriately skeptical investors money back. Ponzi claimed that he could return $200,000 a day to investors and it would not hurt him. Many people turned away still faithful and more people lined up to invest. However, the Commissioner of Banks and the Attorney General of Massachusetts heard about Ponzis claims and sent investigators.
The Boston Press also began to take interest in the man people were calling the financial genius. One particular individual, Richard Grossier, son of the publisher of The Boston Post was perhaps a little more cynical claiming that it was too good to be true. On July 24, 1920, a surprisingly positive Boston Post article hailed Ponzi and his money making scheme. Consequently, hundreds of people crowded Ponzis SEC to invest. Prior to the articles publication the millions of dollars that flowed into his scheme had arrived purely by word of mouth.
Now the SEC was receiving about $250,000 a day. The very same day, Ponzi met with the local bank officials. After concluding that his accounting records were to convoluted to easily sort out, he offered them a plan. Ponzi volunteered to discontinue taking in money, yet he would pay out money while the audit took place. The bank officials agreed, and the SEC remained open. Meanwhile, Ponzi was developing a strategy to free him from the looming predicament. Ponzi would convince his bankers to provide him with $10 million to purchase a fleet of merchant ship for sale by the U. S. Government.
The plan was to transfer all of his companys assets and liabilities to the proposed steam ship company, allowing his investors to trade in their investments for stock in the new company. The plan failed to impress the bankers and it never materialized. By July 26, Clarence Baron, the Wall Street publisher, wrote an article that questioned Ponzis claims. It stated that if Ponzi could make three hundred percent profit for his investors, a true financial wizard would simply invest in his own company. Meanwhile, Ponzi was depositing all of his revenue into a bank account making three- percent interest.
In the next issue, Barons stated that in order for Ponzis scheme to work, 160 million postal reply coupons needed to be circulating. Only 27,000 coupons were circulating in the world. The Post Office also reported that there were no large purchases of postal reply coupons in the United States or overseas. Consequently, hundreds of frenzied investors began withdrawing money from the SEC. The scene resembled a riot. Two women fainted. Nearly three million dollars were withdrawn from Ponzis school street office in three days. Nonetheless, the positive Ponzi paid everyone back with a smile. In fact, Ponzi served the crowd coffee and doughnuts.
Some investors, seeing Ponzis confidence, turned away leaving their money invested. After the articles publication, Ponzi stated that, I only used the postal reply coupon scheme as a blind, I didnt want the Wall Street boys to even get the slightest hint of what my real scheme was. As long as my investors get their money back with profit, I dont have to account to anybody. Charles Ponzi maintained his exuberant demeanor; nonetheless, the inevitable was soon to follow. The following day Ponzi was summoned by the local bank officials. The State Attorney General was by now estimating Ponzi’s liabilities at three million dollars.
Ponzi is quoted as saying, are you saying gentlemen, that I am insolvent? Then I am your prisoner. News of Ponzi’s bankruptcy devastated noteholders who had clung to the hope of getting at least their original investment back. On August 19, Ponzi was brought from jail for a hearing before Federal Commissioner Hayes. The Federal Building was surrounded by a crowd intent on seeing Ponzi, and the hearing was held in its largest courtroom. When the courtroom doors were opened, people pushed past bailiffs and scrambled for seats. This court appearance found Ponzi relaxed and cheerful. Hands casually in pockets, he nodded to friends.
Ponzi sat through an unrelated hearing, and when his own turn came, he waived examination and agreed to no change in bail. The hearing was brief, and Ponzi was remanded to the East Cambridge Jail until his case could be heard in the September term of the Federal District Court. Ponzi reported receiving $5,000 in his cell from hopeful investors, and again promised he could recoup his losses if allowed an extra 60 days. On October 1, a federal grand jury returned two forty-three count indictments against Ponzi. On November 30, he made a deal with the prosecutors, pleading guilty to a single count.
Having dismissed all counts but one, Assistant United States Attorney Shea urged the imposition of the maximum sentence. Shea reminded the assemblees of the extent of Ponzi’s fraud: It is true Mr. Ponzi did collect about $10,000,000. It is also true he paid back about $8,000,000, leaving a difference of about $2,000,000 between what he took in and what he returned. In imposing the maximum five year sentence for a mail fraud count, Judge Hale added his own stern pronouncement: The defendant conceived a scheme which on his counsel’s admission did defraud men and women.
It will not do to have the public, the world, understand that such a scheme as his through the United States instrumentality could be carried out without receiving substantial punishment. 11 With his wife sobbing on his shoulder, Ponzi wrote on a pad of paper which he passed to reporters. The paper stated Sic Transit Gloria Mundi, (Thus Passes Worldly Glory). After numerous indictments, trials, and appeals at the federal and state level, Massachusetts Superior Court Judge Sisk sentenced Ponzi to a seven to nine year prison term as a “common and notorious thief,” on July 11, 1925.
On September 28, 1927 with Ponzi still in a Massachusetts prison, the Immigration Bureau issued a deportation order for Ponzi. After his prison term, he left the United States for Italy. He spent his final days in the charity ward of a Rio de Janeiro hospital, and died on January 15, 1949 at the age of 67. A legal agent claimed Ponzi’s body and buried him using seventy-five dollars Ponzi had saved from a Brazilian government pension. The man who once possessed nearly ten million dollars, died with barely enough to bury his own body. In modern times, society is still burdened by individuals seeking to get rich quick.
Names such as Marty Frankel and Robert Rooney, with their modern form of the Ponzi scheme, have appeared in the news. Although modern con-artists may enjoy the short success Ponzi did, none may ever possess the charm, the demeanor, or the ability to touch the hearts of individuals intended to be swindled. Cite: The American Heritage Dictionary of English Language. 1996. Houghton Mifflin Company 2 Blaylock, Bob and Seanette Blaylock. , Pyramid Schemes, Ponzi Schemes, and Related Frauds. 1997 www. impulse. net/~thebob/pyramid. html N. Y. Times, Jul. 30, 1920, at 1, col. 7.