Friday, October 23, 2020

Who was Charles Ponzi [Financial Crimes Profile]

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Who Was Charles Ponzi

Born in Parma, Italy, in 1883, Charles Ponzi’s early days are somewhat unknown. He claimed to have attended the University of Rome La Sapienza but never graduated.

Ponzi arrived in Boston in November 1903 aboard the S.S. Vancouver. He later told the New York Times that he gambled away most of his money on the voyage to America. “I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me.” The young immigrant’s charisma and confidence would help him pull off one of the greatest financial schemes in history.

Early Scams

Ponzi started out working odd jobs, including as a dishwasher in a restaurant. In 1907, he moved to Montreal, where he found a job as a teller at Bank Zarossi. The bank was formed to cater to the new Italian immigrant population, charging high-interest rates.

When Bank Zarossi went bankrupt because of bad loans, Ponzi was left penniless. He was sentenced to three years in a Quebec prison after he was caught forging a bad check. Rather than tell his mother in Italy that he was in prison, he wrote to her in a letter that he was working at a Canadian prison.

When he was released from jail, Ponzi got involved in yet another criminal venture, smuggling Italian immigrants across the border into the United States. This too landed him in jail—he spent two years behind bars in Atlanta.

The Scheme

On July 24, 1920, the Boston Post ran a front-page story about Charles Ponzi. The headline declared: “DOUBLES THE MONEY WITHIN THREE MONTHS; 50 Per Cent Interest Paid in 45 Days by Ponzi — Has Thousands of Investors.”

In the article, Ponzi portrayed himself as a generous, wealthy man. “I get no pleasure out of spending money on myself, but a great deal in doing some good with it,” he told the Post reporter. After earning his first million, Ponzi explained, “I will spend all over and above the one million trying to do good in the world.”

The article listed Ponzi’s estimated wealth at over $8.5 million.

Two days later, a line of investors appeared outside Ponzi’s office. “Hope and greed could be read in everybody’s countenance,” Ponzi later wrote in his autobiography. “Madness, money madness, the worst kind of madness, was reflected in everybody’s eyes!”

Ponzi described himself as “The ‘wizard’ who could turn a pauper into a millionaire overnight!” and he had the goods to show for it. He owned a 12-room mansion, hired help, had a couple cars including a custom limo, and gold-handled canes. His wife, a pretty, young woman named Rose Gnecco, wore diamonds and jewels.

Though many were skeptical, even other scammers couldn’t figure out immediately what exactly Ponzi’s scheme was.

William Miller, who stole over a million dollars from investors in 1899, was baffled by Ponzi. Days before the Boston Post reported on Ponzi’s scheme in a 1920 article, Miller told the publication, “I may be rather dense, but I cannot understand how Ponzi made so much money in so short a time.”

Federal investigators audited Ponzi’s books, suspicious that his scheme violated the law. In his defense, Ponzi said, “My secret is how to cash the coupons. I do not tell it to anyone. Let the United States find it out if it can.”

The Unraveling

As the feds continued to investigate Ponzi, his own publicist turned against him. Ponzi had hired William McMasters to promote the Securities Exchange Company, but instead, McMasters uncovered Ponzi’s fraud.

After examining Ponzi’s financial records, McMasters discovered, “the only money he had in his hands as of right now was money taken from investors. The huge profits that he discussed so glibly were mythical and nonexistent.”

McMasters went to the Boston Post to expose Ponzi’s fraud. On Aug. 2, 1920, the Post ran the article McMasters called “the exposé of [Ponzi’s] fantastic story.”

That same month, federal regulators raided Ponzi’s office. Unsurprisingly, they didn’t find the massive number of stamp coupons required to pay off investors legally. Instead, they found evidence of mail fraud. Because Ponzi mailed investment updates to his investors, the government could charge him with 86 counts of mail fraud.

Ponzi didn’t see his investors as victims. “Even if they never got anything for it,” Ponzi declared after his conviction, “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!”

The scammer served three and a half years in federal prison for history’s first Ponzi scheme. After he was paroled in 1925, he was sentenced to nine years in state prison on further fraud charges. While out on bail for this charge, Ponzi escaped to sell Florida swampland under a false name.

He would jump bail once more, fleeing to Texas and signing aboard as a seaman on an Italian freighter before being picked up by authorities in New Orleans. When he finally left jail in 1934, he was deported to Italy.

Prison Time

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.

His wife, 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.

The Return Home

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.

Another report says 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.

Summary of crime: Ponzi Scheme was named after Charles Ponzi. He was involved in running a fraudulent investment scheme whereby he paid old investors with new investors money.  Charles had no underlying business for investment, he sold postal reply coupon to unsuspecting investors. He also relied on people’s greed for quick cash and his charismatic charm to make the scheme work.

Route to Jail: In 1920, investors try to get their money out of Ponzi’s company because of Boston Post investigations. As investors cash their checks, Ponzi became overdrawn and had no other means of paying investors. This started the demise of the Ponzi scheme and journey to 14 years in jail.

Estimated income: $250, 000 per day

Financial Loss: $20 million in 1920 dollars ($225 million in 2011 dollars)

Punishment: Charged with 86 counts of mail fraud and spent 14 years in jail

Tips for Avoiding Ponzi Schemes

“Ponzi” schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors.

The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.” 

  • Be careful of any investment opportunity that makes exaggerated earnings claims.
  • Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework before investing your money.
  • Consult an unbiased third party—like an unconnected broker or licensed financial advisor—before investing.

The Reference Shelf

Biography – Here

Smithsonian Magazine – Here

ATI – Here

FBI – Here

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