The Ponzi Scheme

The case

The idea began with a single slip of paper. In the summer of 1919 a letter from Spain reached a small Boston office at 27 School Street with an international reply coupon tucked inside, a voucher that could be exchanged abroad for return postage. Its tenant, Charles Ponzi, noticed that post-war inflation had made the coupons far cheaper in Italy than the American stamps they could be swapped for. On paper, the gap looked like free money.

Ponzi was then 37, a former dishwasher and waiter who had landed in Boston in 1903 with, by his own telling, $2.50 in his pocket. He had served a prison term in Canada for forging a cheque and another in Atlanta for smuggling Italian immigrants across the border. In Montreal he had worked at a bank that paid depositors' interest out of newer deposits until it collapsed. He had seen exactly how such a thing worked, and how it ended.

In January 1920 he founded the Securities Exchange Company and offered investors 50 per cent profit in 45 days, at a time when savings banks paid about 5 per cent a year. He claimed the returns came from buying reply coupons in Europe and redeeming them in the United States. The early investors were paid on time, using money from those who came after them, and they told their friends. By the summer agents were collecting deposits across New England and New Jersey, and the line outside his office stretched down the street. Millions of dollars came in. Ponzi bought a mansion in Lexington and a controlling stake in the Hanover Trust Company, and brought his mother over from Italy in first class.

The coupons could never have carried the weight. Covering what he owed would have required around 160 million of them; the financial journalist Clarence Barron, asked by the Boston Post to look at the scheme, found that only about 27,000 were in circulation, and that Ponzi was not putting his own money into his company. The Post, under its acting publisher Richard Grozier, began publishing hard questions on 26 July 1920. Ponzi met the run that followed with cheerful confidence, handing out coffee and doughnuts to the crowd and paying out about $2 million in three days. Many depositors, reassured, went home and left their money with him.

The ground gave way in August. On 2 August his former publicist, William McMasters, told Post readers that Ponzi was hopelessly insolvent. On 9 August the state bank commissioner stopped Hanover Trust from honouring Ponzi's cheques. On 11 August the Post reported his forgery conviction in Montreal, and the same afternoon the commissioner seized Hanover Trust. A federal audit showed Ponzi was at least $7 million in debt, and on 12 August he surrendered to federal authorities.

He pleaded guilty to a single count of mail fraud on 30 November 1920 and was sentenced to five years. Massachusetts then pursued him for larceny; Ponzi argued that his federal plea should protect him, but the Supreme Court ruled against him in Ponzi v. Fessenden in 1922. After two state trials ended in an acquittal and a hung jury, a third in 1925 convicted him, adding seven to nine years. While out on bail he went to Florida and sold lots in a land syndicate, much of it worthless swamp, was convicted again, and was caught trying to leave the country disguised as a ship's crewman.

Investors lost about $20 million, and at least five banks besides Hanover Trust failed in the aftermath. The method was not new; a Brooklyn bookkeeper known as "520% Miller" had run a similar fraud in 1899. But Ponzi ran it in the open, with newspaper coverage, a smile and a crowd, and it is his name the world kept.