The man behind the scheme

REMEMBER WHEN

Charles Ponzi lent his name and his game to generations of crooks

Back Story

June 10, 2006|By FREDERICK N. RASMUSSEN | FREDERICK N. RASMUSSEN,SUN REPORTER

Two weeks ago, a Houston jury convicted former executives Kenneth L. Lay and Jeffrey K. Skilling of turning Enron into a huge Ponzi scheme. Earlier this year, a convicted Baltimore County felon was charged with operating a Ponzi scheme that cheated 400 Marylanders out of $7.3 million.

A check of The Sun's archive reveals that during the past 15 years, the newspaper has reported on no less than a 119 Ponzi schemes.

So what exactly is a Ponzi scheme?

It immortalizes a fraudulent get-rich quick method and the name of its creator Charles Ponzi -- an uneducated immigrant Italian fruit peddler and self-styled financier who was born in Lugo, Italy, in either 1878 or 1882 -- who managed to pull off a lucrative hoax that swindled thousands out of an estimated $15 million during an eight-month siege in 1920.

Ponzi, like P.T. Barnum, believed that a sucker was born every minute, and he combined his supposed Midas touch with the average citizen's lust for a fast and easy buck.

In 1920, after he began publishing ads promising "Fifty percent in 45 days" in Boston newspapers, the money began pouring into his Securities Exchange Company office on School Street, next to Boston City Hall, from investors all over the United States and Europe.

It was such a tidal wave of money that Ponzi ran out of storage space and started stuffing greenbacks, checks and money orders into desk drawers and even wastebaskets. He was instantly propelled into the financial stratosphere, and his success showed no signs of abating.

It was, of course, a classic pyramid scheme, in which money from later investors is used to pay off the original investors.

His suckers came from all walks of life -- widows, young men and women, the elderly -- as well as hard-headed businessmen.

Early in the morning, School Street would fill up with the anxious awaiting Ponzi's arrival from his palatial estate near Lexington.

And as his chauffeur-driven cream-colored limousine slowly nosed down the street bearing the immacuately dressed and smiling Ponzi, the crowd would go wild.

"It exploded early. Jostling men and women, waving handfuls of bills, crushed against each other in a heaving line that struggled up School Street between the Parker House and King's Chapel," reported The Evening Sun.

"Police struggled to keep order as fistfights smashed out all over the place. Out came the little man of big schemes, never hurried, always bland and bowing"

"My business was simple. It was the old game of robbing Peter to pay Paul," Ponzi explained to an Associated Press reporter in 1948. "You would give me $100, and I would give you a note to pay you $350 in three months. Usually, I would redeem my note in 45 days."

Ponzi later started filling the Hanover Trust Co. of Boston with money derived from his swindle and then bought a controlling interest in the bank, which gave him the presidency.

And then Ponzi really began to dream Jazz Age big.

He began wooing investors with a plan to form a $200 million corporation that would establish a chain of "profit sharing banks" across the nation, where depositors would share with the stockholders in the profits from this novel venture. He then began eyeing steamship lines and railroads. There was no limit to his financial Niagara.

And then came the reporters. There are always nosy reporters.

A reporter for the Boston Post began sniffing around the Ponzi empire and discovered his past, which included smuggling aliens, forgery and a stretch of jail time in Canada for theft.

Ponzi brought a libel suit against the newspaper. A publicity agent he had hired to quell the gathering storm went to the Boston Post and reported that his boss was a "financial idiot."

The newspaper promptly paid the agent $5,000 for an inside story on the workings of the teetering Ponzi empire. There was a run on the Hanover Trust Co., with investors demanding their money back.

In the middle of the bank run, Ponzi withdrew a few million, boarded a train for Saratoga Springs, N.Y., and promptly lost the money at the racetrack.

The Securities Exchange Co. and later the Hanover Trust Co. closed after federal agents raided them. Ponzi was found to be insolvent; an audit showed he had liabilities of $7 million and assets of $4 million.

On Aug, 2, 1920, Ponzi surrendered to federal authorities. There were two indictments containing 86 counts, and he was asked to plead to one. On Dec. 1, 1920, in federal District Court, Ponzi -- now without his smiling self-confidence -- changed his plea of not guilty to guilty of mail fraud.

He was sentenced to five years in federal prison and after serving 3 1/2 years, he was released and was tried on state charges. He was again found guilty and sentenced to nine years.

Released in 1934, he was deported to Italy. Before World War II, he moved to Brazil, where he worked for an airline and taught English.

His autobiography, The Rise of Mister Ponzi, was followed by an uncompleted second volume, The Fall of Mister Ponzi.

"I guess I was No. 1 in those days before Al Capone. I guess the only news about me that most people want to hear is my death," he said in the 1948 interview.

"Once I had $15,000,000. I used to carry a couple of million in my pockets in certified checks and cash. Look at me now. I guess a lot of people would say I got what I deserved," he said.

Ponzi, who survived on a government pension, died in the charity ward of a Rio de Janeiro, Brazil, hospital. He left behind $75 for his funeral expenses.

Reflecting on his life a year before his death, Ponzi told the AP reporter, "Those were confused money-mad days. ... I was in it plenty deep, rolling in other people's money."

On School Street, where mobs once gathered to greet the financial genius, a single traffic policeman was on duty and a lone newsboy stood guard over papers announcing Ponzi's death.

"There was no line waiting to buy papers," The Evening Sun reported.

fred.rasmussen@baltsun.com

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