In Ponzi We Trust

Borrowing from Peter to pay Paul is a scheme made famous by Charles Ponzi. Who was this crook whose name graces this scam?

Charles Ponzi mug shots
Mug shots of Charles Ponzi, Boston financial wizard, taken during his arrest for forgery under the name of Charles Bianchi. Bettmann / Corbis

Editor's Note, April 14, 2021: In the wake of the death of convicted fraudster Bernard Madoff, Smithsonian looks back at the crook who gave Ponzi schemes their name

John Kenneth Galbraith once observed that "the man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud." Although the details may vary, all flimflam games rely on their basic ability to make a lie look like the truth. Even today, confidence artists continue to work their scams with great success. Time and again, people from every walk of life demonstrate their ability to abandon common sense and believe in something that is simply too good to be true by succumbing to the con man's call.

Yet when all is said and done, the Internet is merely a vehicle for swindlers to reach their victims. "What is new—and striking—is the size of the potential market and the relative ease, low cost and speed with which a scam can be perpetrated," FTC Chairman Robert Pitofsky told a Senate subcommittee during a February hearing on Internet fraud. But there is nothing new in the scams themselves: they are the same pyramid schemes, phony business opportunities and phantom storefronts that have been fooling the unwary and greedy for centuries.

Many of these computer-savvy crooks have taken their cue from an Italian immigrant named Charles Ponzi, a dapper, five-foot-two-inch rogue who in 1920 raked in an estimated $15 million in eight months by persuading tens of thousands of Bostonians that he had unlocked the secret to easy wealth. Ponzi's meteoric success at swindling was so remarkable that his name became attached to the method he employed, which was nothing more than the age-old game of borrowing from Peter to pay Paul. The rules are simple: money taken from today's investors is used to pay off debts to yesterday's investors. Typically, these investors are lured by promises of exorbitant profits—50, even 100 percent. Often, they are coached to recruit more investors to enrich themselves further. The problem is that there is no actual investment going on; the only activity is the shuffling of money from new investors to old ones. Everything is fine until the scheme runs out of new investors and the whole house of cards comes tumbling down.

We still hear about Ponzi schemes, or pyramid schemes, as they are more frequently called. Last year, the collapse of dozens of Ponzi schemes in Albania sparked mass rioting that escalated into a national crisis. And in New York, investors were out an estimated $1.5 billion when the Bennett Funding Group, described by regulators as a "massive, ongoing Ponzi scheme," went belly-up. On the Internet, a company called Fortuna Alliance promised investors monthly returns as high as $5,000; more than 8,600 people bought into the scheme, which was shut down by the FTC in 1996. Fortuna eventually stipulated to an injunction prohibiting its alleged scam. In January 1998, a judge ordered the company to start paying back its investors. The FTC says it is seeking $5 million in refunds for consumers.

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. Years later, "Honest Bill," as he came to be known after a jail term in Sing Sing and a turn down the straight and narrow, questioned the workings of Ponzi's enterprise. "I may be rather dense, but I cannot understand how Ponzi made so much money in so short a time," Miller observed to a reporter from the New York Evening World mere days before the bottom fell out of Ponzi's scheme.

But whatever Ponzi lacked in originality, he had plenty of finesse—and chutzpah. "He was a fascinating crook—the ultimate con man," says Ponzi biographer Donald Dunn. Ponzi's investors ran the gamut from working-class Italian immigrants like himself to cops and politicians. He even accepted money from a priest.

In the summer of 1920, Ponzi was front-page news virtually every day in the Boston papers. But prior to 1920, few people outside Boston's Italian community had ever heard of Charles Ponzi. He told the New York Times that he had come from a well-to-do family in Parma, Italy. He also claimed to have studied at the University of Rome, but said that he was not suited to the academic life. "In my college days, I was what you would call here a spendthrift. That is, I had arrived at the precarious period in a young man's life when spending money seemed the most attractive thing on earth."

When his money ran out, young Ponzi decided the wisest course of action was to head west. On November 15, 1903, he stepped off the gangplank of the SS Vancouver in Boston Harbor with only a couple of dollars in his pocket—the result, he said, of being taken in by a cardsharp during the transatlantic crossing. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," Ponzi later told the New York Times.

The road to riches was a long one for the ever-optimistic Ponzi, who waited and bused tables in New York City, painted signs in Florida and worked small jobs up and down the East Coast. In 1917, he headed back to Boston in response to a newspaper ad placed by merchandise broker J. R. Poole, who needed a clerk.

He soon met young Rose Gnecco on a streetcar and wooed her energetically. A small, pretty woman from a modest background, Rose was swept off her feet by her older, seemingly sophisticated suitor. Rose's youthful innocence shines through even in newspaper photographs, as does her unswerving devotion to her husband. The couple married in February 1918. Ponzi took over his father-in-law's grocery business and proceeded to make a mess of it. (He had already left Poole, who apparently failed to recognize his new clerk's latent financial genius.)

It was not long before Ponzi struck out on his own, and finally hit upon the scheme that—for a short time—was to make him rich beyond his wildest dreams. He had come up with the idea for an international trade journal, which he believed could make a tidy advertising profit. But the bank where he sought a $2,000 loan, Hanover Trust Company, did not agree. Following a brusque rejection by the bank president, Ponzi sat alone in his little School Street office and pondered his next move.

It came to him while opening his mail one day in August 1919. As Ponzi relates in his shamelessly exuberant autobiography, The Rise of Mr. Ponzi, a business correspondent from Spain, interested in learning more about Ponzi's aborted journal, had enclosed a small paper square that put the well-oiled wheels of Ponzi's imagination into overdrive.

The little scrap of paper was an international postal reply coupon, and the Spanish correspondent had enclosed it in prepayment of reply postage. Purchased in a Spanish post office for 30 centavos, it could be exchanged for a U.S. postage stamp worth 5 cents, a redemption rate that was fixed by international treaty. But the Spanish peseta, Ponzi knew, had fallen recently in relation to the dollar. Theoretically, someone who bought a postal reply coupon in Spain could redeem it in the United States for about a 10 percent profit. Purchasing coupons in countries with weaker economies could increase that margin substantially, he reasoned. It should be possible, then, to make a financial killing by buying huge quantities of these coupons in certain overseas countries and redeeming them in countries with stronger currencies. Ponzi called his new business the Securities Exchange Company, and set out to promote his idea.

It was a big idea—one that Ponzi managed to sell to thousands of people. He claimed to have elaborate networks of agents throughout Europe who were making bulk purchases of postal reply coupons on his behalf. In the United States, Ponzi asserted, he worked his financial wizardry to turn those piles of paper coupons into larger piles of greenbacks. Pressed for details on how this transformation was achieved, he politely explained that he had to keep such information secret for competitive reasons.

Of course, there was no network of agents. Nor, for that matter, did Ponzi expend any effort to corner the market on postal reply coupons. A final audit of his company's assets after the whole business was over turned up $61 worth of the coupons, according to Dunn.

Dunn's book, Ponzi! The Boston Swindler, provides a dramatized account of Ponzi's wild ride to riches and shows that, if anything, Ponzi's genius lay in psychology, not finance. Ponzi knew that his concept—the path to easy riches—was so alluring that the worst thing he could do was try to sell it too aggressively. Borrowing a page or two from Tom Sawyer, he cultivated an image among friends and acquaintances as a man on the verge of wealth who preferred not to discuss his good fortune in detail—unless, of course, he was pressed. In his role as the busy but cheerful investment expert, Ponzi showed up at boccie games and neighborhood cafés, plied his pals with good cigars and bonhomie, then rushed off to meet with one of his many important "clients," Dunn relates.

Only after his victims were well primed was Ponzi ready to dangle his bait: the grand plan in which his investors received 50 percent interest in 90 days. (Later he sweetened the pot, promising 50 percent interest in 45 days.) By December, the money had begun to roll in.

Most of the actual investment pitches were done by sales agents who were trained by Ponzi and received 10 percent commissions for investments that they brought in to him. In turn, many of those sales agents recruited "subagents" who received 5 percent commissions for new investors. Once Ponzi paid off his first round of investors, word of the financial "wizard" on School Street spread quickly. Ultimately, some 40,000 people joined the feeding frenzy. Many people simply reinvested their profits with Ponzi, thereby relieving him of actually having to make good on his promise. At the height of his success, Ponzi had offices from Maine to New Jersey, and was fending off shady offers from prospective "partners" in New York.

The newspapers caught wind of Ponzi after a man named Joseph Daniels filed a $1 million suit against him in July 1920, according to Dunn. Daniels, a furniture salesman, laid claim to a share of Ponzi's fortune on the basis of an old debt. His lawsuit for what was at the time an enormous amount of money started a buzz about Ponzi outside the circle of investors he had cultivated.

By then, Ponzi had built the lifestyle he had pursued for so many years: a 12-room mansion in upscale Lexington; servants; a couple of automobiles, including a custom-built limousine; and fine clothes and gold-handled Malacca canes for himself, and diamonds and other baubles for Rose. He purchased commercial and rental properties all over Boston and acquired stock in several banks. He even bought out his former employer, Poole. "The more I bought, the more I wanted to buy," Ponzi wrote. "It was a mania." But what he really wanted was control of a bank. He arranged a takeover of Hanover Trust, the same bank that had turned down his loan application the previous year. A few months later, when Ponzi fell, so did Hanover Trust. (The Commonwealth of Massachusetts, it turned out, had $125,000 on deposit with Hanover Trust—a revelation that figured in the September 1920 resignation of State Treasurer Fred Burrell.)

On July 24, 1920, the Boston Post ran a front-page feature on Ponzi with the headline: "DOUBLES THE MONEY WITHIN THREE MONTHS; 50 Per Cent Interest Paid in 45 Days by Ponzi—Has Thousands of Investors." The article described his rags-to-riches ascent, including details of his postal reply coupon scheme. It pegged Ponzi's worth at $8.5 million.

Monday, the 26th, started out as a banner day for Ponzi. The scene that awaited him as he approached his office that morning in his chauffeur-driven Locomobile "was one that no man could forget," he later wrote.

"A huge line of investors, four abreast, stretched from the City Hall Annex, through City Hall Avenue and School Street, to the entrance of the Niles Building, up stairways, along the corridors...all the way to my office!...

"Hope and greed could be read in everybody's countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, the worst kind of madness, was reflected in everybody's eyes!...

"To the crowd there assembled, I was the realization of their dreams....The ‘wizard' who could turn a pauper into a millionaire overnight!"

Interestingly, the U.S. Post Office Department announced new conversion rates for international postal reply coupons less than a week later—the first change in the rates since prewar days, the New York Times reported. Officials insisted that the new rates had nothing to do with Ponzi's scheme. However, they also insisted it was impossible for anyone to do what Ponzi claimed to be doing. (Postal authorities today say the same thing: although international postal reply coupons are available at post offices where there is a demand for them, regulations make speculation in them impossible.)

The tide turned quickly against Ponzi. He had come under investigation by postal and legal authorities as early as February, but they appeared to be making little progress in their efforts. Meanwhile, the editors at the Boston Post, possibly chagrined at having published the article that injected so much momentum into Ponzi's enterprise, launched an investigation into his business. The bad press enraged Ponzi. At the advice of his publicity agent, a former newspaperman named William McMasters, Ponzi offered to cooperate with the U.S. District Attorney's office by opening his books to a government auditor and declining to accept new investments, as of noon that day, July 26, until the audit was complete.

Word that Ponzi was closing his doors prompted a huge run, as thousands stormed School Street to redeem their investment vouchers. Ponzi directed his clerks to refund the money of everyone who presented a voucher. On one day, the Post reported, Ponzi paid out more than $1 million. Frightened investors who cashed in their chips early got back only their principal, which, Ponzi noted, saved him considerable interest.

Ponzi maintained a cool head. He played games with the authorities—on the one hand appearing to cooperate with them, and on the other snubbing them to talk to reporters, who provided daily coverage of the unfolding drama. "‘POSTAGE STAMP' KING DEFIES FEDERAL GOVERNMENT TO LEARN HOW HE PROFITS," the Washington Post reported on July 30. In the article, Ponzi shrugged off the notion that he was under any obligation to reveal details of his business dealings to officials. "My secret is how to cash the coupons. I do not tell it to anyone," he asserted. "Let the United States find it out, if it can."

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.

When Ponzi emerged from jail in 1934, balding and 40 pounds heavier, immigration authorities were on hand with a deportation warrant. He had never become an American citizen and was considered an undesirable alien. On October 7, after his appeals to remain in the United States were rejected, he was deported to Italy. Rose stayed on in Boston with plans to join him once he found employment, but after two years she tired of waiting and finally divorced him. For years, says Dunn, who interviewed her not long before her death, she was dogged by rumors that she had a secret stash of her husband's ill-gotten gains. But Rose was a victim herself: she and eight of her relatives had loaned Ponzi more than $16,000. After Ponzi's departure, Rose led a pinched and quiet existence, eventually remarrying after her husband's death and moving to Florida, where she tried to escape the notoriety of her former husband's escapades.

Accounts of Ponzi's life after his eviction from the United States vary. According to one version, he talked his way into a high-ranking financial ministry job in Mussolini's government. When officials realized that he was not the financial genius he purported to be, he fled carrying two suitcases stuffed with cash and caught a steamer to Brazil.

Dunn, who's done the most extensive research on Ponzi, uncovered a different story. He reports that Ponzi got help from his second cousin, Col. Attilio Biseo of the Italian Air Force, who was commander of the Green Mice Squadron and a friend of Mussolini's. Biseo landed Ponzi a job with a fledgling airline doing business between Italy and Brazil. This new career kept Ponzi in high style between 1939 and December 1941, when the United States entered World War II and the Brazilian government cut off supplies to Ponzi's airline, having learned that it was ferrying strategic supplies to Italy.

Out of a job, Ponzi scraped by, teaching English and French and later working as an interpreter for an Italian importing firm, according to Dunn. But his eyesight was failing and a stroke in early 1948 left him partially paralyzed. Ponzi died in a charity hospital in Rio de Janeiro on January 18, 1949, leaving $75 to pay for his burial.

Why does anyone fall for such scams? "It's human nature," says Susan Grant of the National Consumers League. "The crooks know that there are basic human factors that they can appeal to—the desire to do what you think you see other people doing around you, making money and getting rich."

In other words, wishful thinking. In 1920, people saw Ponzi as a man who could make the impossible possible. Today, many people in search of lucrative investment opportunities "see the Internet as a place where all things are possible," observes Paul H. Luehr, who chairs the FTC's Internet Coordinating Committee. Sometimes, they simply can't tell the difference between a legitimate business enterprise and a hoax. But other times it's clear that they don't really want to know. Grant and Luehr tell of inquiries they've received from consumers in search of reassurance that an attractive scheme is legitimate. But when cautioned against it, they become angry. "Many times people are mad at the government for spoiling a ‘good' investment opportunity," says Luehr.

Today's operators often use high-tech bells and whistles to lure their prey. Ponzi's approach was more charismatic. But the bait is always the same and the outcome is inevitable. Up to 95 percent of the people who buy into Ponzi schemes eventually lose all their investments, says Luehr. Generally, it is only the con man who gets the easy money. For Ponzi, there undoubtedly were other rewards as well: excitement and power. Richard Ault, a retired special agent and criminal profiler for the FBI, speculates that, more than anything, Ponzi wanted to be "something special." A poor immigrant, he sought to become part of the Boston establishment that had excluded him, Ault believes. "It was an impossible goal, but he managed to achieve a little bit of it for a short period of time."

To Ponzi, it was all a grand, desperate game that he was determined to play to its conclusion. At the end, he had this to say about the mad caper on which he had led the people of Boston: "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!"

To Charles Ponzi, who began with nothing, ended up the same way but enjoyed a brief interlude of power and fame, it undoubtedly was.

Mary Darby, a freelance writer in Washington, D.C., invests in mutual funds, and hopes not to lose her shirt.

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