Charles Ponzi and His Scheme

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Podcast Transcript

In January 1920, an Italian American businessman in Boston started a new company. In order to raise money, he took $100 investments from 18 people and offered them a fabulous return on their money in only 45 days, and he delivered on his promise. 

Soon people were lining up to give him their money and everything worked great….

…until it didn’t.

Learn more about Charles Ponzi, the man whose name is synonymous with fraud, on this episode of Everything Everywhere Daily.

Charles Ponzi was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi in the town of Lugo, Italy in 1882. 

He was born to a family which had been quite wealthy but had fallen on hard times. 

He eventually was accepted to the University of Rome La Sapienza, but he spent most of his time drinking and partying and he wound up broke and without a degree. 

In the first years of the 20th century, waves of Italians were immigrating to the United States and some of them were returning back to Italy very wealthy. 

Ponzi was encouraged by his family to do the same, so in 1903 he set out for America. He arrived in Boston on November 15 with only $2.50, because he had gambled away the rest of his saving on the ship coming over. 

He quickly learned English and got a job at a restaurant as a dishwasher. He worked his way up to being a waiter but was fired because he was shortchanging the customers.  

I think you can probably already tell exactly what sort of guy Charles Ponzi was at this point. 

He bummed around doing odd jobs and found himself in Montreal in 1907. He got a job at a new bank called the Banco Zarossi. Banco Zarossi catered to new Italian immigrants, so it was a natural fit for Ponzi who could speak Italian, English, and French. 

He worked his way up to bank manager when he discovered something shocking about the bank.

Banco Zarossi was offering 6% interest rates on their deposits which was double the rate offered anywhere else. 

As such a lot of money was coming into the bank. 

Ponzi found out that the bank had lost a lot of money on some bad real estate investments.  The way they were able to pay everyone their interest was because they had so much new money coming in. 

The money from new depositors was being used to pay off the interest from the older depositors. 

This obviously wasn’t sustainable and the bank eventually went under, but not before the bank’s owner, Luigi Zarossi, fled to Mexico, abandoning his family with a small fortune. 

Ponzi lost all of his money when the bank failed. 

He then walked into the office of one of the bank’s former customers, Canadian Warehousing, looking for a job. When he arrived, no one was in the office, so helped himself to a check that was sitting on a desk and he wrote a check to himself for $423.58. 

He was quickly caught (hint: don’t write a forged check to yourself) and he spent three years in prison in Quebec

In 1911 he was released, and quickly got himself caught up in a plot to smuggle illegal Italian immigrants into the United States from Canada

That landed him a two-year prison term in Atlanta, Georgia. There he befriended an Italian mobster and a Wall Street con man by the name of Charles Morse. 

When he was released he worked his way back to Boston and took a job as a nurse at a mining camp. While there, another nurse suffered burns from an accident. Ponzi volunteered to undergo surgery to have skin removed from his back and legs to help the nurse. 

He developed complications from his surgery and was let go, proving that no good deed goes unpunished. 

He met an Italian woman in Boston named Rose Maria Gnecco and asked her to marry him, despite not having told her about his time in prison. Her mother found out and told her, but she went ahead with the marriage anyhow. 

Ponzi started a company where he would publish a directory of Boston businesses, and that failed.

He took over his wife’s family’s fruit stand, and then that failed. 

It was in the summer of 1919 that he got the idea that would make him infamous. 

He was sending letters to companies in Europe about his business directory when one of the letters came back with something inside the letter. It was an International Reply Coupon. 

For those of you who don’t know what an International Reply Coupon is, and I honestly don’t know why most of you would, it is something you can buy at a post office in your country that can be redeemed in another country. 

For example, if I am sending a letter to Japan, I can put an International Reply Coupon in the envelope. The person in Japan could then redeem the International Reply Coupon at their post office for postage to send me a letter in return.

It serves the same purpose as a self-addressed stamped envelope would, only for international mail. 

These are actually still available in some countries today, but they are hardly ever used. The United States stopped issuing them in 2013 and the United Kingdom stopped selling them in 2011. Many countries which sell them are planning on phasing them out. 

What Ponzi realized was that the value of the International Reply Coupon was different in different countries. The cost of postage might be lower in one country than in another. That means you could buy an International Reply Coupon for, let’s say 1-cent in one country, and then redeem it for a 5-cent stamp in another country. 

What many people don’t realize in the story of Charles Ponzi is that there was in fact a small kernel of truth in his initial idea. There was in fact some sort of theoretical arbitrage opportunity. 

That being said, a theoretical arbitrage isn’t the same thing as a real functioning business. More on that in a bit. 

In order to kick off his new business venture, he needed money, and given his string of failures, money was something that he didn’t have. 

He went to several banks to get a loan, but he was turned down….and can you really blame the banks??

He then went to several friends in Boston to raise money and promised them that he would deliver 50% returns in just 45 days, or 100% returns in 90 days. 

He explained that the spread on International Reply Coupons was so great, they could easily get thier money back. 

In January 1920, he launched his own company called the “Securities Exchange Company”. 

He launched the company with 18 investors who invested a total of $1,800. 

He magnaged to pay all of them off with in a month. 

He quickly opened a larger office in a proper office building.

In February, the amount of money that came in was $5,000, and in March it was $25,000.

He hired agents who received a commission to drum up more sales. 

As word of the success of the company spread, more money started to come in, and the area from which they were sending in money grew from just Boston. 

By May, the total amount invested was $420,000, and by June it was up to $2.5 million. 

In the beginning of July he was bringing in a million dollars a week and by the end of July he was bringing in a million dollars a day. 

The “Securities Exchange Company” set up offices from Maine to New Jersey. 

People were mortgaging their houses and putting their life savings into the company. The Boston Police force invested some of their money. Rich Bostonians eventually caught wind and began investing their money. 

Ponzi had his money in the Hanover Trust Bank of Boston, which was a small bank that catered to Italian immigrants. He eventually had so much money in the bank that he was able to take it over. 

Many of the people who invested with Ponzi didn’t even take their money out. They just reinvested it in hopes of greater returns. 

Ponzi spent his money lavishly. He purchased a mansion and one of the best cars you could buy in 1920. He brought his mother over from Italy in a first-class cabin. 

He used the money to buy a wine company and a company that made macaroni, and an attempt to have some profits to pay off his investors. 

Despite appearances, things were not well. 

The entire International Reply Coupon scheme went nowhere. As I mentioned before, there was a theoretical arbitrage opportunity. In practice, however, it didn’t work. 

He in effect was able to buy cheap stamps. However, he had no way of converting the stamps to cash in large quantities. He just had a lot of stamps that he paid a below-market rate for.

Moreover, even if he could covert the stamps to cash, there was no way he could possibly scale the business to a level to justify the amount of money that was being invested. International Reply Coupons are very cheap. To cover his investments, he would need multiple ships the size of the Titanic constantly running back and forth across the Atlantic, filled with International Reply Coupons. 

Because the International Reply Coupon business failed, he kept paying off investors with new money that was coming in from other investors. 

One financial writer wrote an article calling Ponzi’s business a scam. Ponzi actually sued him for libel….and won $500,000 in damages. This was because at the time, whoever made the claim had to prove it, and all he had was ridiculous returns to point to. 

On July 24, the Boston Post wrote a glowing article about the company, but just two days later, their opinion had turned. 

They actually hired financial experts to do the math. They found out that Ponzi’s business would require 160 million International Reply Coupons, but there were only 27,000 in circulation. The post office went on record as saying no one was actually buying large numbers of  International Reply Coupons domestically or internationally. 

Moreover, Ponzi didn’t invest his own money into the company, which was a massive red flag. 

Once the Boston Post articles were published, things began to come apart quickly. There was a run by investors to get their money out. 

The government got involved, worried that Ponzi could bring down the entire Boston banking industry. An investigation quickly found out that instead of having $7 million dollars in assets, Ponzi was actually millions of dollars in debt. 

On August 11, the story broke about his prior prison sentences, and on August 12, Ponzi turned himself in to federal authorities. He was charged at the federal level with mail fraud and at the state level with larceny. 

On November 1, 1920, he pleaded guilty in federal court to one count of mail fraud, thus avoiding a trial with 86 counts and potentially life in prison. 

He was sentenced to five years in prison and was released after 3 ½.

As soon as he was out of federal prison the state of Massachusetts tried him for larceny.

He argued that this was double jeopardy because he already served time for the same crime, and his case actually went to the Supreme Court which ruled against him. 

In October 1922, serving as his own attorney because he didn’t have any money, he was acquitted. In a second trial, on other charges, the jury was deadlocked. In a third trial, he was finally convicted.

While in jail, believe it or not, he received cards and letters from his investors, and still had people who asked him to invest their money for them. 

In 1925, he was out on bail as he appealed his conviction, and he fled to Florida. 

While there he did what came naturally, and started up a brand new scam that promised 200% returns in just two months, by buying Florida swampland.

He was charged with securities fraud in Florida, went to trial, and was sentenced to a year in prison. While appealing the verdict, he again fled.

This time he shaved his head and tried to get on a ship to go back to Italy. He told one of the crew members who he was, always a bad idea if you are trying to use a fake identity, and was arrested in New Orleans. 

He was sent back to Massachusetts and served seven more years in prison. 

When he was released in 1934, he was deported back to Italy. His wife stayed in the United States and divorced him.

In Italy, he bounced around between jobs and scams and lived the rest of his life in poverty. He managed to find some work as a translator, which was something he was actually good at. 

He got a job working for the Italian national airline in Brazil, but when World War II broke out, he couldn’t fly back and was stuck there. 

He ended up dying in 1949 at a hospital for the poor in Rio de Janeiro at the age of 66. 

Ponzi’s scheme didn’t just fail, it became the reference point for almost all future financial schemes. Many of his investors lost everything, and those who did get money back only received pennies on the dollar. 

You’d think that people would eventually learn that incredible returns on an investment are just too good to be true, but similar schemes are still run today. 

The most famous was that of Bernie Madoff. Madoff actually managed to run his con for much longer and made far more money. In inflation-adjusted terms, Bernie Madoff actually took investors for more than 53x what Charles Ponzi did. 

So long as people will willing to suspend reason to pursue outsized returns on their investments, there might always be people willing to run Ponzi schemes.


The executive producer is Darcy Adams.

The associate producers are Thor Thomsen and Peter Bennett.

Today’s review comes from listener gravydave over at Podchaser. They write:

Gary answers those questions you didn’t know you needed answered when it comes to history. Easy listening, great info!

Thanks, gravydave! That is the thing about history. You don’t know what you don’t know. It is only once you know it that you realize how much you didn’t know. 

Remember, if you leave a review of send me a boostagram, you too can have it read the show.