3 March 2019

Charles Ponzi - fraudster

Name forever linked with investment scam


Charles Ponzi set up in business in Boston having twice previously been in jail
Charles Ponzi set up in business in Boston
having twice previously been in jail
The swindler Charles Ponzi, whose notorious fraudulent investment scheme in 1920s America led his name to be immortalised in the lexicon of financial crimes, was born Carlo Ponzi in the town of Lugo di Romagna on this day in 1882.

Ponzi, who emigrated to the United States in 1903 but arrived there almost penniless, had been in prison twice - once for theft and a second time for smuggling Italian immigrants illegally into the US from Canada - when he came up with his scheme.

Always on the lookout for ways to make a fast buck, Ponzi identified a way to make profits through exploiting the worldwide market in international postal reply coupons.  This was not his scheme, simply the starting point.

These coupons, which allowed a correspondent in one country to pay for the cost of return postage from another country, were sold at a universal cover price but variations in exchange rates meant that a coupon bought in one country might be worth more in another.  Coupons bought in Italy, for example, could be exchanged for stamps in the US that could then be sold for several times more than the dollar-equivalent cost of the coupon in Italy.

The difference was big enough, Ponzi reckoned, to generate as much as 400 per cent profit. He planned to use his profits to fund an investment scheme by which he could offer returns much higher than any available at the mainstream banks and yet make a handsome margin for himself.

Ponzi's natural charm and snappy dress was very persuasive in attracting clients
Ponzi's natural charm and snappy dress
was very persuasive in attracting clients
It seemed a guaranteed winner. Although his efforts to borrow money to get the venture started did not work out, Ponzi approached some of his wealthier friends in Boston, Massachusetts, where he had married a local Italian girl, Rose Maria Gnecco, and was working as a translator. He promised to double their money within 90 days, or deliver 50 per cent profit in 45 days, and duly did so.

His next step was to set up his own company and attract investment from the wider public. His Securities Exchange Company attracted $1,800 in the first month. Ponzi delivered his clients vast returns as promised. Word quickly spread.

The more investors he was able to satisfy, the longer the queue to join in. By July 1920, only six months after his launch, Ponzi was accepting investments totalling almost $1 million every day.

He spent lavishly, buying a mansion in Lexington and the most expensive car available. He booked a stateroom on an ocean liner to bring his mother to America from her home in Parma.

Unbeknown to his clients, however, Ponzi’s plan to reinvest their money in international reply coupons had been massively flawed at the outset. To generate the profits he needed would have required him to import millions of coupons. In fact, there were only 27,000 in existence.

Ponzi signs a cheque for a delighted investor in his Boston office in the spring of 1920
Ponzi signs a cheque for a delighted investor in his
Boston office in the spring of 1920
Instead, when clients’ investments matured, Ponzi was paying them with money he received from new investors. There was no external profit at all.  Logically, it was foolhardy to continue. Yet with his total of clients growing every day, he always had a surplus of cash and so long as that was the case he could continue in business. In any event, many of his clients simply reinvested their returns.

The problem for Ponzi was schemes that look too good to be true tend to attract the attention of the disbelieving. In this case, it was the Boston Post newspaper, who began to carry articles posing questions about his success.

After one such article, he sued for $500,000 libel damages and won, yet the seeds of doubt had been planted. More investigations followed, investors began to panic and soon Ponzi was paying out more than he was taking in.

The cover of a recent reprint of Ponzi's  autobiography, written in the 1940s
The cover of a recent reprint of Ponzi's
 autobiography, written in the 1940s
His final mistake was to hire a former Post journalist, William McMasters, as his publicity agent. McMasters came across documents that showed Ponzi had kept going by effectively ‘robbing Peter to pay Paul’. He sold his story to the Post for $5,000.

More panic followed and then an investigation by the Massachusetts Bank Commissioner. It was the beginning of the end for Ponzi. His bankers stopped honouring his cheques and three of his clients filed a petition in court to declare him bankrupt. In November 1920 he was sentenced to five years in jail. His investors had collectively lost around $20 million.

After further prison terms, in between which, while on bail pending an appeal, he attempted to set up a property scam in Florida, he was deported to Italy in 1934. Divorced in 1937 - his wife stayed behind in Boston - he tried various business schemes without success and eventually settled in Brazil, where he died in 1949, although he did first write his autobiography.

Despite Carlo Ponzi’s inevitable demise, countless others down the years have tried to make money using the same methods. The most high-profile example this century involved the financier and investment advisor Bernie Madoff, who was sentenced to 150 years’ jail in 2009 after running a Ponzi Scheme through his Wall Street brokerage that was ultimately outed as the largest financial fraud in US history, worth $64.8 billion.

The Rocca Estense in Lugo di Romagna now serves as the town's municipal offices
The Rocca Estense in Lugo di Romagna now serves as
the town's municipal offices
Travel tip:

Lugo di Romagna is a town of 32,000 people about 30km (19 miles) west of Ravenna and 18km (8 miles) north of Faenza in Emilia-Romagna. Its most famous monument, the Rocca Estense (Este Castle), was partially rebuilt during the French occupation in 1500. The interior houses portraits of famous lughesi and a lunette attributed to Mino da Fiesole. It has been Lugo’s town hall since 1797. Also of note is the 19th century covered market hall known as Il Paviglione and the restored 18th century Teatro Rossini. Apart from Ponzi, famous lughesi include the First World War fighter pilot Francesco Baracca and a former world motorcycling champion, Mario Lega.

Hotels in Lugo di Romagna by Hotels.com

The Teatro Regio in Parma, while not so well known as La Scala in Milan, is considered one of Italy's top opera houses
The Teatro Regio in Parma, while not so well known as La
Scala in Milan, is considered one of Italy's top opera houses
Travel tip:

Parma, where Ponzi claimed to have grown up after his family moved there from Lugo, is an historic city in the Emilia-Romagna region, famous for its Prosciutto di Parma ham and Parmigiano Reggiano cheese, the true ‘parmesan’. In 1545 the city was given as a duchy to the illegitimate son of Pope Paul III, whose descendants ruled Parma till 1731. The composer Giuseppe Verdi was born near Parma at Bussetto and the city has a prestigious opera house, the Teatro Regio.

More reading:

Michele Sindona - the fraudster with links to the Vatican

The mysterious death of Roberto Calvi

Joe Petrosino - the immigrant who became a New York crime fighter

Also on this day:

1578: The death of Venetian doge Sebastiano Venier

1585: The inauguration of Palladio's Teatro Olimpico in Vicenza

1768: The death of composer Nicola Porpora

Selected books:

Ponzi: The Incredible True Story of the King of Financial Cons, by Donald Dunn

The Rise of Mr Ponzi, by Charles Ponzi

(Picture credits: Rocca Estense by Lalupa; Teatro Regio by Stefano Sansavini; via Wikimedia Commons)


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