Ponzi Scheme: Part 2

Charles Ponzi: The Instinctual Conman

Early Life

It is commonly thought that the Ponzi scheme was first done by its namesake, Charles Ponzi. However, this racket is called “a Ponzi scam” because the swindling modus operandi used by Charles Ponzi was widely publicized and propagated by the media following WWI.

There have been several Ponzi schemes done by individuals over the decades, from before Charles was even born till as recently 2009, with the Bernie Madoff incident.

Charles Ponzi was born in the March of 1882 in Emilia-Romagna, Italy. Although his ancestors were affluent, the family got involved in some bad investments and were pushed to poverty.

Ponzi initially went to the University of Rome La Sapienza, but instead of spending his time in his education, he went around the cafes, bars, and operas that were ubiquitous across Rome.

After 4 years though, he was coerced to leave the University, ending up on the streets with barely any money and no degree. So, emigrated to the USA in 1903 and landed in Boston with just $2.50 to his name.

After doing a series of odd jobs, he relocated to Montreal, Canada, and worked at a bank. However, he tried forging a cheque and got caught in the process. Having spent 3 years in prison, he returned to Boston but was again in prison for illegally smuggling Italian immigrants.

The Ponzi Scheme

After his stint in prison, Charles got involved in the activity that made him widely known for the wrong reasons - the Ponzi scam.

From the 1900s till the 1920s, there was a postal instrument known as an international reply coupon (IRC). An IRC can be exchanged for postage stamps between different countries.

For example, if A in India wanted to send a letter to B in the USA, and B is not expected to pay for the postal stamp required to send a reply to A, then A would pay for an IRC and send it along with their letter. B can then redeem the stamp and send it along with their reply.

At that time in history, it was perfectly legal to buy IRCs in one country and sell it in another. Taking advantage of this arbitrage practice & the high inflationary rates caused by the Great War, Ponzi bought IRCs from countries suffering a high inflation rate and sold them in the USA, since it wasn’t suffering as much as some other nations.

The discrepancy between the exchange rate of the different currencies facilitated the profit earning of Ponzi. Soon, Ponzi’s reputation as a credible businessman increased, and his scheme was propagated all over Massachusetts. However, things went awry when a publicist of Charles Ponzi, William McMasters, worked in conjunction with The Boston Post to expose his employer after some things in his scheme seemed amiss.

Logically speaking, it was impossible to provide the returns promised by the infamous hustler since the value of IRCs issues was way less than the money being circulated.

This prompted the FBI to conduct an audit into Ponzi’s accounts and Ponzi was finally exposed after a year of swindling and fraud. He was arrested on the charges of mail fraud and as a result, thousands of people lost their precious money & 6 banks were coerced to shut down.

Ponzi spent only 3 years in prison and was released on parole. But he was again arrested for theft but was granted bail. Unfortunately, Ponzi still didn’t stop his illegal activities and was arrested in 1927 for committing real estate fraud in Florida.

He spent 7 years in prison and was deported to Italy since he didn’t have US citizenship. Ponzi ended up in Brazil in his final years and died in 1949 in Rio de Janeiro, penniless and lost to history, just like the naïve public he swindled off $250 million.

- Anirudh Sai H