As the run continued, Ponzi ordered up sandwiches and coffee to be distributed to the mobs of people waiting outside his office. He directed that women be moved to the front of the line, after hearing that several had fainted in the sweltering summer heat. Uncertain whether he was a crook or a hero, the crowds simultaneously booed and cheered him. Many people changed their minds while waiting to turn in their vouchers, convinced that their investments would pay off in the end. The Boston Post reported how one man proclaimed Ponzi "the greatest Italian of them all." With false modesty, Ponzi pointed out that Columbus had discovered America and that Marconi had discovered the wireless. "But Charlie," the fan replied, "you discovered where the money is!" Meanwhile, speculators in Ponzi's hire bought up notes at a discount from the worried, Dunn reports.
The investigation slogged on. "OFFICIALS BALKED BY PONZI PUZZLE," the Boston Post observed. Then, on August 2, the Post dropped a bombshell after enlisting the cooperation of McMasters, Ponzi's erstwhile publicity agent, who wrote a copyrighted, first-person report in which he proclaimed Ponzi "hopelessly insolvent." "He is over $2,000,000 in debt even if he tried to meet his notes without paying any interest," McMasters declared. "If the interest is included on his outstanding notes, then he is at least $4,500,000 in debt."
Still, McMasters found it difficult to condemn the little financier: "No wonder Ponzi is confident: He sees an apparently unlimited pile of cash...the public dippy about him...and Wall Street ‘experts' who never did anything like it themselves offering ‘sure-thing' explanation of his ‘operations'—is it any wonder the thing has gone to his head?"
Note holders besieged the School Street office the day the McMasters article ran. Ponzi hotly denied the charges of insolvency, and threatened to sue both McMasters and the Post.
The public circus escalated. On August 10, Ponzi gave a luncheon address at Boston's Hotel Bellevue for the Kiwanis Club, which had invited him for a "battle royal" with a mind reader named Joseph Dunninger. The idea was that Dunninger would "throw the X-ray of clairvoyance on the subtle brain of the little Italian and reveal what he found to the audience," the Boston Globe reported. But the spectators were so enthralled by Ponzi that the contest apparently never came off; at 2:45, Ponzi was still fielding questions from the audience.
Ponzi audaciously implied that he dealt directly with foreign governments in order to purchase the vast quantities of coupons needed to support his enterprise. Because the governments from whom he bought coupons profited themselves, they "naturally would not care to reveal" the exact nature of their business, he explained. "PONZI TELLS KIWANIS CLUB HOW HE GOT HIS MILLIONS," the Globe shouted from its front page. Editors at the Chicago Tribune, which also reported on the Kiwanis Club affair, were more skeptical: "PONZI REVEALS PHILOSOPHER'S STONE: 0+0=$," the headline ran.
On August 11, the Boston Post made the sensational revelation that the financial wizard was a former jailbird, having served time (1908-10) in Canada for forging checks. The article, the result of the Post's own investigation, ran complete with mugshots of Ponzi from Montreal police. Later, it was learned that Ponzi had served another term in a federal prison in Atlanta for smuggling five Italians from Canada into the United States.
The next day, Edwin Pride, the government auditor, concluded his examination of Ponzi's books. He found Ponzi to be $3 million in the red (he later revised it to $7 million). Ponzi was placed under arrest. "PONZI WEARING HIS SMILE EVEN IN EAST CAMBRIDGE JAIL," the Boston Evening Globe reported. "The man's nerve is iron," his jailer marveled.
Half-a-dozen banks crashed in the aftermath of Ponzi's fall. His note holders received less than 30 cents on the dollar; many investors held on to their notes, clinging desperately to the belief that their hero would somehow come through, Dunn says. For its relentless reporting, the Boston Post won a Pulitzer Prize.
Ponzi was convicted on federal charges of using the mail to defraud. He served 31/2 years and was paroled. In 1925, he was convicted on state fraud charges. Out on bail while the verdict was under appeal, he headed for Florida to raise money by selling swampland under the name "Charpon." He was quickly arrested and convicted of fraud. He jumped bail when he learned that the Supreme Judicial Court of Massachusetts had upheld his conviction in that state. With authorities in two states in pursuit, Ponzi fled to Texas. He signed aboard as a seaman on an Italian freighter, but was captured in New Orleans. Ponzi was returned to Massachusetts to begin his sentence at the state prison in Charlestown.