The original Ponzi schemer himself

Charles Ponzi at first arrest in America, right; at the height of his career in 1920, just before his fall from grace.

It seems that when major scams are uncovered (and there have been a lot of them lately), the news media always finds someway to bring forward the name Ponzi, or Ponzi Scheme, to explain how investors have gotten ripped off by someone who built a financial pyramid without having real assets at the base of that pyramid. It might be interesting to take a look at the infamous man who is forever identified with this scheme.

Charles Ponzi was born in Parma, Italy, in 1882, to wealthy parents (so he said). Rather than being born with the proverbial silver spoon in his mouth, as he would have others believe, he really was born with a forked tongue. From an early age he was known to fabricate stories and embellish facts, and he had no sense of guilt when he stretched the truth.

Ponzi took a position with the Italian postal department as a youth, then parlayed that position into a spot at the University of Rome, but instead of the class room, he spent most of his school time in cafes, bars, and at the opera. In 1903, at the age of 21, Ponzi immigrated to Boston in America, aboard the SS Vancouver. He was virtually broke, having gambled away his life's savings during the voyage. Said Ponzi, "I landed in Boston with $2.50 in my pocket, but $1 million in dreams -- those dreams never left me."

Ponzi was forced to accept menial jobs in Boston, finally landing a job as a dishwasher in a restaurant, where he was allowed to sleep on the floor. He learned English quickly and worked his way up to "waiter," but soon was fired from that job for short changing customers and repeated thefts from the restaurant.

In 1907 Ponzi went to Montreal in Canada to work in a bank, which catered to Italian immigrants. While most banks paid 3 percent on deposits, Ponzi's bank paid 6 percent. This gained many new customers for the bank, but that interest was paid, not out of earnings, but from the deposits of new customers. When the bank began to fail, Ponzi's employer took off for Mexico, with most of the bank's assets.

Ponzi, himself, got into trouble at this time when he forged and cashed a $430 check. He was arrested and spent three years in a Quebec prison. He "explained" in a letter to his mother in Italy, that he had accepted a position as special assistant to a prison warden.

After serving his prison sentence, Ponzi returned to the U.S. in 1911. He immediately got involved in a scheme to smuggle illegal Italian immigrants into the United States from Canada. He was arrested again and spent two years in an Atlanta prison. His duties were easy there, as he acted as a translator for the prison warden.

When he was released from the Atlanta prison he returned to Boston. There he met Rosa, a stenographer, whom he asked to be his wife. Ponzi did not inform Rosa about his past -- but his mother wrote to the girl about Ponzi's jail stays and warned Rosa about marriage to her son. Sometimes love is blind, and Rosa married Charles in 1918, in spite of the warnings. The marriage lasted until 1937, when it ended in divorce.

For a time after his marriage, Ponzi seemed to try to go straight. He took various jobs, including working as a clerk in one of Rosa's father's grocery stores, but he never was satisfied with work in the grocery stores. It rankled him that there were no prospects for great riches.

One day in 1919, Ponzi received a catalog from Spain, which contained an international reply coupon -- IRC -- which a patron could use to respond to the company. Ponzi saw in this the method that would launch him on his life's work. The coupon allowed a patron to effectively exchange a 5 cent Spanish stamp for a 10 cent US stamp -- a menial transaction in itself, but when multiplied by hundreds of thousands, Ponzi could see a scheme for making millions.

Ponzi contacted friends abroad to buy up IRCs, and then send them to Ponzi in the United States for redemption, resulting in a profit. He claimed that the profit from these transactions was in excess of 400 percent, and was not illegal. But Ponzi was not content to use these transactions just for himself. He let it be known that he would be willing to help his friends and neighbors to make similar profits. He started his own company, The Securities Exchange Co., and guaranteed 50 percent profit in 45 days. He smoothly explained that the arbitrage in the IRCs made profits very easy to come by -- a foolproof plan for making untold riches.

People began to invest in his company. The first investors were paid off as promised. Word spread, and money began to pour in from eager investors throughout New England. People mortgaged their homes. They sent in their life savings, to get in on the 50 percent in 45 days opportunity, and most people chose to let their profits accumulate in the Security Exchange Co. Ponzi bought his own bank. By July of 1920, Ponzi was making $250,000 PER DAY ($2.3 million in 2008 dollars). He bought a luxurious home (a mansion) in Lexington, Mass. He brought his mother to America, via first class luxury steamship.

As long as new money kept coming in, old investors could be paid, but a constant supply of new money from new customers was necessary because there were no profits from the business. In mid July there was a run on the Securities Exchange Co. when some investors decided to pull out their investments. When irate investors stormed the Securities Exchange Co., Ponzi greeted them cheerfully. He served them coffee and donuts and assured them that they had nothing to worry about. For those who insisted on their money back he paid out over $2 million, temporarily stemming the panic. He was so convincing that many of the discontents left with their money still in the Securities Exchange Co.

But time was running out for Ponzi. On July 26, an article appeared in Barron's Financial Paper. It pointed out that in order to cover the investments in Ponzi's company, 160,000,000 of the IRCs would have to be in circulation. The US Postal Service reported that only about 27,000 IRCs were outstanding. There was another run on Ponzi's company. This time coffee and donuts and smooth talk did not work. Ponzi was broke.

On Aug. 12 Ponzi was arrested by federal agents. His liabilities were $7 million. He had defrauded 17,000 investors, and bilked them out of millions of dollars. Yet, ironically, his investors were outraged with the arresting officers. Though many had been ruined by Ponzi, they were blinded by their faith in the man. They refused to admit their gullibility, and treated him as a hero, who, if left alone would make everything right.

In October 1920, Ponzi was tried on the first 10 counts of fraud and larceny charges. Ponzi acted as his own attorney and spoke so persuasively that he was found innocent by the jury. Later he was tried for 10 additional charges. This time he was sentenced to 7-9 years in jail as a "common and notorious thief."

In late 1922, with Ponzi in jail, it surfaced that Ponzi had entered the U.S. illegally in 1903. The Justice Department began proceedings to have Ponzi deported back to Italy. But while he was out on bail Ponzi traveled to Florida and began selling "swamp land" to gullible tourists. He was arrested and again was sent to prison. Upon his release in 1934 he was immediately deported to Italy. Rosa chose to stay in Boston. The two were divorced in 1937. Though Rosa later remarried, the two exchanged hopeful love letters until Charles Ponzi's death in 1949.

In Italy, Ponzi engaged in a few minor schemes, and during World War II Mussolini appointed him to a position in the Italian Government, Financial division -- a job which he botched, but managed to flee Italy, to South America -- with ill-gotten Italian Treasury notes.

Charles Ponzi, that affable scoundrel, died broke and alone, of a stroke in a Charity Hospital in Rio de Janero in 1949. He never did show remorse for his crimes against the people who trusted him with their money. In an interview with an American journalist shortly before his death, he was quoted as saying, about his victims,

"Even if they never got anything from it, it was cheap at that price ... 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."

Source: Wikepedia and Various internet sites