INVESTORS CAN LEARN FROM THOSE WHO WERE FOOLED BY PONZI
Sky-high returns are probably too good to be true
Most people recognize the name Charles Ponzi and associate him with a type of financial fraud called a Ponzi scheme. Here is a history of Ponzi and his investment scheme.
Carlo "Charles" Ponzi was born in Italy in 1882 and lived there until age 21, when he hitched a ride to America on a steamship to fulfill his dreams of riches and fame. Ponzi learned English and worked in a New York restaurant where he was reportedly fired for short-changing bills.
In 1907, Ponzi became an assistant teller at an international bank in Montreal and started forging customers' names on checks and stealing the money. Convicted of forgery, Ponzi went to prison in 1908 under the alias Charles Bianchi.
After his release, Ponzi returned to the United States and made his way to Boston. Hired as a clerk for an import-export firm, he became familiar with an instrument that would be the basis for his investment scam - international postal reply coupons.
An International Postal Congress in 1907 started issuing postal reply coupons that could be redeemed for postage stamps in participating countries. Americans could buy coupons and mail them to friends and relatives in Europe, who would redeem them for stamps in their own country that could be used on envelopes sent back to America. The only hitch was the cost of these coupons varied from country to country based upon the economy and exchange rates.
Ponzi discovered that a postal coupon bought in a European country for the equivalent of one penny could be redeemed at a U.S. post office for the equivalent of six 1-cent stamps. Given this exchange rate, he figured one could buy large numbers of coupons in Europe and redeem them in America for much more. Ponzi calculated a 200-percent profit on each transaction and believed he could pyramid this profit into millions of dollars. Unfortunately, he had no money and decided to tap the investing public.
Ponzi established the Securities Exchange Company and a few daring Bostonians loaned him money. In return, Ponzi issued company promissory notes which guaranteed a return of 50-percent to 100-percent interest in 45 to 90 days. At the time, banks were paying 4- to 5- percent on savings deposits. When the notes came due, Ponzi paid huge returns as promised.
Word spread quickly, investors lined up in the street, and soon more than 1,000 investors had bought Ponzi's notes, including policemen, priests, mothers and blue-collar workers. It worked for a while as Ponzi used the money from new investors to pay off his earlier obligations - the age-old pyramid scheme.
As the company prospered, so did Ponzi, buying a 20-room house with air conditioning, heat and a heated pool - luxuries at the time. A chauffeur-driven car, tailored suits and a gold-handled walking stick caught the attention of local media and astute citizens who questioned his ability to pay such outrageous rates of return. Ponzi's bubble popped as the local district attorney started an investigation and reporters began snooping into Ponzi's past and uncovered his criminal record.
Investors swarmed Ponzi's offices, demanding their money back but the business was insolvent with a deficit of millions. Ponzi had bought just a few postal coupons and the investment opportunity was a scam.
Ponzi eventually pleaded guilty to using the mail to defraud and was sentenced to five years in federal prison. Convicted of theft charges in Massachusetts, he disappeared on appeal and turned up in the great state of Florida. Under the assumed name of Charles Borelli, Ponzi was involved in a pyramid land scheme, purchasing land at $16 an acre, subdividing it into twenty-three lots, and selling each lot off at $10 a piece. He promised all investors that their initial $10 investment would translate into $5,300,000 in just two years, but not telling them that much of the land was underwater and absolutely worthless.
Ponzi was indicted for fraud and sentenced to one year in a Florida prison.
Deported to Italy, Ponzi eventually settled in Brazil. He died a pauper in a charity ward in 1949, but Ponziís scheme lives on. Today's swindlers continue to fleece investors who fall for false visions of grandeur. The next time you're offered a deal that sounds too good to be true, be careful. It may be a Ponzi scheme.