Charles Ponzi

• 1. Introduction

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  Charles Ponzi, born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, once described his arrival in America to a reporter for The New York Times. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," he said. He worked under a handful of aliases, among them Charles Ponci, Carlo, Benny Broncko and Charles P. Bianchi. His surname now names a whole category of fraud, even though he did not invent the trick. How does a penniless immigrant end up lending his name to a crime? What did he promise his investors, and what did he really do with their money? Who finally broke the spell, and how did a man who once lived like a millionaire spend his last years?

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• 2. Lugo To Boston

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  Lugo, in the Emilia-Romagna region of the Kingdom of Italy, is where Ponzi was born on the 3rd of March 1882. He later told The New York Times that his family came from Parma. His ancestors had been well-to-do, and his mother still used the title "donna". The family money, however, was long gone.

  Ponzi took a postal job early on, then won a place at the University of Rome La Sapienza. His richer friends called the university a "four-year vacation", and he trailed them through bars, cafés and the opera. Four years later he had spent everything and left with no degree.

  At that time, a number of Italian boys were sailing to the United States and returning home wealthy. Ponzi's family urged him to follow them, hoping he would restore their old standing.

  On the 15th of November 1903, Ponzi reached Boston aboard the S.S. Vancouver. He had gambled away the rest of his savings during the crossing. He picked up English quickly and spent several years on odd jobs along the East Coast. At one point he washed dishes in a restaurant and slept on its floor. He worked his way up to waiter, only to be fired for theft and for shortchanging customers. By 1907 he had given up on the United States and headed north to Montreal.

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• 3. Cells And Lessons

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  Banco Zarossi, on Saint Jacques Street in Montreal, was newly opened when Ponzi became an assistant teller there in 1907. Luigi "Louis" Zarossi had started it to serve the Italian immigrants arriving in the city. Ponzi was charming and spoke English, French and Italian, which helped him win the job. Zarossi paid 6 percent interest on deposits, double the going rate, and the bank grew fast. Ponzi rose to manager.

  Then he learned the truth. Bad real estate loans had put the bank in serious trouble, and the generous interest was being paid out of money from newly opened accounts. This was the first time Ponzi saw the method of "robbing Peter to pay Paul". The bank failed, and Zarossi fled to Mexico with a large portion of his customers' money.

  Ponzi stayed in Montreal and lived at Zarossi's house, helping the abandoned family while he planned a fresh start in the United States. With no money, that proved hard. At the offices of Canadian Warehousing, a former Zarossi customer, he found nobody in and a checkbook lying around. He wrote himself a check for $423.58, forging the signature of company director Damien Fournier. Police noticed his big spending right after the check was cashed. Ponzi held out his wrist and said, "I'm guilty".

  He served three years as Inmate #6660 at St. Vincent-de-Paul Federal Penitentiary, a bleak place on the outskirts of Montreal. He could not bring himself to tell his mother. Instead he mailed her a letter saying he had found work as a "special assistant" to a prison warden.

  After his release in 1911, Ponzi meant to return to the United States. He instead joined a plot to smuggle Italian illegal immigrants across the border, was caught, and spent two years in Atlanta Prison. There he translated for the warden, who was intercepting letters from the mobster Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo.

  Another inmate, Charles W. Morse, became a true role model. Morse was a wealthy Wall Street businessman and speculator. He fooled prison doctors by eating soap shavings to look ill, and he was soon released. Ponzi finished his own term after Morse left, with an extra month added because he could not pay a $50 fine.

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• 4. The Coupon Idea

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  Pearl Gosid, a fellow nurse at a mining camp, was severely burned in an accident, and Ponzi did something nobody expected. Back in Boston after Atlanta, he had taken a nurse's job at the camp, where he dreamed up a plan to start a water and power utility at another camp and sell its stock. Though he did not know Gosid, he volunteered for two major operations to give her 122 square inches of skin from his back and legs. Pleurisy and other complications followed, and he lost his job.

  Rose Maria Gnecco, a Boston stenographer, was the woman he proposed to next. Her Italian-American family kept a small fruit stall downtown. Ponzi said nothing about his years in jail, but his mother wrote to Rose with the full story. Rose married him in 1918 anyway. A run of failures followed: a stint at his father-in-law's grocery, work at the import-export company JR Poole, an advertising directory that businesses would not buy, and the family fruit company.

  A small office at 27 School Street, Boston, was where Ponzi spent the summer of 1919 trying to sell business ideas to contacts in Europe. A company in Spain wrote back asking about his advertising catalog, and the letter carried an international reply coupon. That coupon showed him a weakness in the postal system.

  A reply coupon let someone in one country prepay the postage for a answer from a correspondent abroad. It cost the price of postage where it was bought but could be exchanged for stamps covering postage where it was redeemed. When those two values differed, there was a possible profit. Inflation after World War I had pushed the cost of Italian postage, measured in dollars, far down. A coupon bought cheaply in Italy could therefore be traded for more valuable American stamps, which could then be sold.

  Ponzi claimed the net profit, after expenses and exchange rates, topped 400%. That kind of arbitrage is legal. He quit his job as a translator to pursue it, but he needed a large sum to buy coupons in weaker European currencies. Several banks turned him down, among them the Hanover Trust Company, whose manager Henry H. Chmielinski refused to lend him a cent.

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• 5. The Money Machine

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  Ninety days was all Ponzi asked of his friends in Boston. He told them he would double their investment in that time, while banks were paying only 5% a year. The coupons, he explained, made such returns easy. Some friends invested and were paid as promised, collecting $750 in interest on $1,250.

  In January 1920, Ponzi founded the Securities Exchange Company. He offered a 50% profit in 45 days or a 100% profit in 90 days. In the first month, 18 people put in a total of $1,800. The very next month he paid them, using money from a newer set of investors. William W. Miller, a Brooklyn bookkeeper nicknamed "520% Miller", had taken in $1 million with a similar deception in 1899, and Ponzi may have drawn on that example.

  A larger office in the Niles Building on School Street soon followed. Ponzi hired agents, paid them generous commissions, and sent them to find investors in New England and New Jersey. Between February and March 1920, the total invested rose from $5,000 to $25,000. By May he had made $420,000, and by June investors had put in $2.5 million. In July he was approaching a million dollars per day, with branches stretching from Maine to New Jersey.

  Working-class immigrants like Ponzi were his first investors. Word then climbed the social ladder, and well-to-do Boston Brahmins joined in. At its peak, nearly 75% of Boston's police force had invested. His chauffeur John Collins and his own brother-in-law put money in. So did young newspaper boys with a few dollars and a banker from Lawrence, Kansas, who invested $10,000. Some people mortgaged their homes, and most reinvested their profits rather than cashing out.

  The arithmetic never worked. To turn the first investors' $1,800 into real arbitrage profit, Ponzi would have needed 53,000 postal coupons. For the roughly 15,000 investors who followed, he would have had to fill Titanic-sized ships with coupons just to carry them from Europe. He had not found any way to turn coupons into cash. He made no effort at legitimate profit, and payouts simply kept returning to him as investors rolled them over.

  A mansion in Lexington, Massachusetts, was among his first purchases, and he kept accounts at several banks across New England. He bought a Locomobile, one of the finest cars of its day. He had bought two first-class tickets to Italy for a delayed honeymoon with Rose. He changed them to bring his mother from Italy in a first-class stateroom instead. She lived with the couple in Lexington but died soon after. On the 31st of July 1920, he told Father Pasquale Di Milla, director of the Italian Children's Home in Jamaica Plain, that he would donate $100,000 in her honor. He also bought a macaroni company and part of a wine company, hoping they would earn money to repay his investors.

  Hanover Trust, the small bank on Hanover Street in Boston's mostly Italian North End, was where Ponzi kept the bulk of his money. He hoped that a big enough account would let him impose his will on the bank, or even become its president. After depositing $3 million, he bought a controlling interest in it through himself and several friends.

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• 6. Press And Panic

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  A Boston financial writer who doubted that anyone could legally deliver such returns found himself in court, because Ponzi sued for libel and won $500,000 in damages. Libel law at the time put the burden of proof on the writer and publisher. That effectively froze serious probes into Ponzi's dealings for a while.

  Joseph Daniels, a Boston furniture dealer, had supplied Ponzi with furniture that Ponzi could not pay for, and he sued. The suit failed, but it set people asking how a penniless man had become a millionaire so fast. Some investors pulled out in a run on the Securities Exchange Company. Ponzi paid them all, and the run stopped.

  On the 24th of July 1920, The Boston Post printed a favorable article about Ponzi, and money poured in faster than ever. He was taking in $250,000 a day. Just below the article sat a bank advertisement offering 5% a year, which made his 50% in 45 days look even more striking. On the next business day, thousands of Bostonians were waiting at his office to hand over their cash.

  Richard Grozier, the Post's acting publisher while his father Edwin, the owner, was away, stayed suspicious. So did city editor Eddie Dunn, and both sent investigative reporters after Ponzi. Massachusetts authorities were also looking into him, and on the day the article ran he met with state officials. He steered them away from his books by offering to stop taking money during the investigation. That was lucky, because he kept no proper records.

  On the 26th of July, the Post began a series of articles asking hard questions. The paper consulted Clarence W. Barron, the financial journalist who headed Dow Jones & Company. Barron noticed that Ponzi was not investing any of his own money in his company. He also worked out that 160 million postal reply coupons would have to be in circulation to cover the investments. Only about 27,000 actually were. The United States Post Office added that coupons were not being bought in quantity at home or abroad.

  The articles set off a panic run. Ponzi paid out $2 million in three days to a wild crowd outside his office. He worked the crowd himself, handing out coffee and doughnuts and cheerfully telling people they had nothing to worry about. Many changed their minds and left their money. The scene drew the attention of Daniel Gallagher, the U.S. Attorney for the District of Massachusetts, who commissioned Edwin Pride to audit the company. Pride's task was hard, since Ponzi's bookkeeping consisted only of index cards bearing investors' names.

  William McMasters, a publicist Ponzi had hired, grew uneasy at the endless talk of coupons. He later called Ponzi a "financial idiot" who did not seem to know how to add. In late July he found several highly incriminating documents showing that Ponzi was merely "robbing Peter to pay Paul". He took them to Grozier, his former employer, who offered $5,000 for the story. It ran in the Post on the 2nd of August 1920 and declared Ponzi hopelessly insolvent. Ponzi claimed $7 million in liquid funds, but McMasters reported he was at least $2 million in debt, and as much as $4.5 million in the red with interest. Another massive run followed, and Ponzi paid everyone off within a day.

  Joseph Allen, the Massachusetts Bank Commissioner, feared that heavy withdrawals could bring Boston's whole banking system to its knees. He then learned that Ponzi-controlled accounts had received more than $250,000 in loans from Hanover Trust, which suggested Ponzi was far less flush than he claimed. Allen set two bank examiners to watch the accounts. On the 9th of August they reported that so many investors had cashed checks that Ponzi's main account was badly overdrawn. Allen ordered Hanover Trust to stop paying checks from it and arranged an involuntary bankruptcy filing by several small investors.

  Attorney General J. Weston Allen then said there was little to support Ponzi's claims of large postal coupon dealings. State officials invited noteholders to the Massachusetts State House to give their names and addresses. The same day, Ponzi saw a preview of Pride's audit, which showed him at least $7 million in debt.

  On the 11th of August, the Post ran a front-page story on his Montreal past, including the forgery conviction and his role at Zarossi's scandal-ridden bank. That afternoon, Joseph Allen seized Hanover Trust over numerous irregularities. This accidentally ruined Ponzi's last-resort plan to borrow from the bank's vaults. The next day, his certificate of deposit there, once worth $1.5 million, shrank to $1 million as officials tapped it to cover the overdraft. Even if he could have cashed it, he would have held only $4 million in assets.

  Five other banks fell along with Hanover Trust. Investors were practically wiped out and received less than 30 cents on the dollar. They lost about $20 million in 1920 dollars. Bernie Madoff's similar scheme, which collapsed in 2008, cost investors about $18 billion, or 53 times as much.

  Amid reports of an imminent arrest, Ponzi surrendered to federal authorities and accepted Pride's figures. He was charged with mail fraud for mailing letters that told his marks their notes had matured. Bail was set at $25,000, but he was immediately re-arrested on state larceny charges and posted another $10,000 bond. After the Post published the audit results, the bail bondsman feared Ponzi would flee the country and withdrew the federal bail, sending him back to prison. Attorney General Allen declared that if Ponzi ever regained his freedom, the state would seek more charges and a bail high enough to keep him in custody.

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• 7. Courts And Flight

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  Eighty-six counts of mail fraud, spread across two federal indictments, put Ponzi at risk of life imprisonment. At his wife's urging, he pleaded guilty to a single count on the 1st of November 1920 before Judge Clarence Hale. Before sentencing, the judge said: "Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel's admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out... without receiving substantial punishment." Ponzi received five years in federal prison.

  Three and a half years was how long he served before release, and he was almost immediately indicted on 22 state charges of larceny. This shocked him, because he believed he had a deal for the state to drop its charges if he pleaded guilty federally. He sued, arguing that a state retrial over the same offenses would be double jeopardy. The case, Ponzi v. Fessenden, reached the U.S. Supreme Court. On the 27th of March 1922, the Court ruled that federal plea bargains have no standing against state charges. It added that Ponzi faced no double jeopardy, since Massachusetts charged larceny while the federal government charged mail fraud, even though both implicated the same operation.

  In October 1924, Ponzi went on trial for the first 10 larceny counts. Since he was insolvent, he acted as his own attorney. Speaking as persuasively as he had to his duped investors, he was acquitted on all counts. A second trial on five of the remaining charges ended with a deadlocked jury. At a third trial he was found guilty and sentenced to an additional seven to nine years as "a common and notorious thief". Efforts to deport him as an undesirable alien also surfaced in 1924.

  In September 1925, Ponzi was freed on bail while appealing the state conviction. He fled to the Springfield neighborhood of Jacksonville, Florida, and launched the Charpon Land Syndicate, with "Charpon" blending his own name. Aiming at the Florida land boom, he sold tiny tracts of land, some of them underwater, and promised 200% returns in 60 days. It was really a swampland scam in Columbia County. A Duval County grand jury indicted him in February 1926 for violating Florida trust and securities laws. A jury found him guilty on the securities charges, and the judge sentenced him to a year in the Florida State Prison. Ponzi appealed and went free on a $1,500 bond.

  Tampa was the next stop, where Ponzi shaved his head, grew a mustache, and tried to leave the country as a crewman on a merchant ship bound for Italy. He gave away his identity to a shipmate. Word reached a deputy sheriff, who followed the ship to its last American port of call, New Orleans, and arrested him. Ponzi's pleas to Calvin Coolidge and Benito Mussolini for deportation went unanswered. He was sent back to Massachusetts to serve out his sentence, which took seven more years.

  Government investigators meanwhile tried to trace his tangled accounts to learn how much he had taken and where it went. They never untangled them, and could only conclude that millions of dollars had passed through his hands.

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• 8. Exile And Afterlife

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  Governor Joseph B. Ely of Massachusetts turned down Ponzi's request for a full pardon on the 13th of July 1934. Ponzi had been released that year with an immediate deportation order. His charismatic confidence had faded, and an angry crowd met him at the prison gates. He told reporters, "I went looking for trouble, and I found it." On the 7th of October, he was officially deported.

  Rose stayed in the United States and divorced him in 1937. She had never wanted to leave Boston, and Ponzi was in no position to support her anyway.

  In Italy, Ponzi hopped from scheme to scheme, and little came of any of them. He eventually found work in Brazil as an agent for Ala Littoria, the Italian state airline. During World War II, the airline's operation there was shut down after British intelligence services intervened and Brazil sided with the Allies. It was in these years that Ponzi wrote his autobiography.

  The Hospital São Francisco in Rio de Janeiro is where Ponzi died, in its charity ward, on the 18th of January 1949. He was blind in one eye and partly paralyzed. He had spent his last years in poverty, translating only occasionally, and he left an estate of $75, barely enough to bury him.

  Looking back, Ponzi said of his scheme: "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." Near the end of his life, he told an Associated Press reporter, "My business was simple. It was the old game of robbing Peter to pay Paul."

  Jake Epstein plays Ponzi in "Home for the Holidays", the third stand-alone Christmas special of the Canadian detective series Murdoch Mysteries. In 2016, Tory Belleci, host of White Rabbit Project, investigated the postal coupon scheme in the fourth episode. It took first place for the episode against five other contenders, thanks to its originality and the amount gotten away with in modern currency.

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