The namesake for all the Ponzi schemes that came after. The man who not only pulled off this massive fraud, but was also evidence that if you are confident enough and able to convince others of your great abilities, everything is possible.
Many decades before Bernie Madoff went down in history with his giant fraudulent scheme
Carlo, later known as Charles, Ponzi tricked thousands out of their savings and even, at one point, sold land to investors in Florida – land that was, well, covered under water, Florida swampland.
Ponzi went from a poor man emigrating to the USA from Italy to being one of the richest man on the planet, only to die a poor man with about $ 100 to his name. In spite of his minuscule finances, Ponzi always eager to impress and chase his dream of great riches, dressed immaculately. His dapper style always saw him in nice suits, pocket squares, and matching hats and ties. He always looked the part, conveying success and an air of a great financier.
Who was Charles Ponzi
Born in Parma, North Italy, the city of Parmigiano-Reggiano, or Parmesan, and Parma ham, in 1882, Ponzi emigrated to the USA in 1903. Arriving in Boston, he worked odd menial jobs to make ends meet. On his journey from Italy to the USA he had gambled away most of his money on the boat leaving him with a couple of dollars to his name. Rumors have it that Ponzi already got into trouble as a teenager for petty crimes such as stealing money from the church collection box. He wasn't the most skilled as he frequently got caught. Something that should run like a thread throughout his life, only that the stakes got higher the older he became.
In 1907, after working as a waiter, a dish washer, and in other low paying jobs, he moved to Montreal to work as an assistant teller for Banco Zarossi.
It is quite astonishing that Ponzi always sought out new opportunities and was not afraid of taking risks. Maybe if he had stayed on the right path, he might have gone down in history not as one of the biggest scam artists, but a great entrepreneur.
While in Montreal at Banco Zarossi, he noticed a few inaccuracies in the bank's books. The bank had speculated on bad property deals and Zarossi, the founder, attempted to pay the interest on the bad loans with the money deposited in customer accounts. Ponzi, however, did not participate in any illegal activities at that point, he left that for later.
After Banco Zarossi shut down with its founder Zarossi fleeing to Mexico, Ponzi embarked on his first major fraud. As a penniless man, eager to return to the USA, he decided the quickest way of making the money to fund his trip back to the USA was to forge a former bank customer's signature. He wrote himself a check for a few hundred dollars, but was arrested by police shortly after and sentenced to two years in a Montreal prison.
Upon his release he picked up where he had left off just before his arrest and headed to the USA. His freedom was short-lived, however, as he was again caught up in another type of criminal activity. This time it wasn't financial fraud, but the smuggling of Italian immigrants across the border that earned him another two years in prison in Atlanta.
Following his arrest, Ponzi spent some years working in legitimate jobs before he started one of the greatest Ponzi schemes in history.
What allowed Charles Ponzi to pull off his stunt?
1919 marked the year that Charles Ponzi got the idea for his path to becoming rich. In the pursuit of new business opportunities, Ponzi wrote to acquaintances in Europe. After some time waiting for a reply from any of his European contacts, he received back a letter that would change his life. It wasn't the letter per se that sparked his interest and would set the path for his next moves, it was what his Spanish correspondent included with the letter. The Spanish company that had sent the letter to Ponzi attached an International Reply Coupon, a certificate that functioned as an international currency.
The certificate entitled the bearer to exchange the coupon for a stamp in any country in the world. During the World War I period, with Europe working to claw its way back to normality and many of European currencies depressed, an International Reply Coupon purchased in a country with a depressed currency would be worth a multiple elsewhere. Ponzi's land of origin, Italy, was one such economically depressed nation and he quickly realized that he could buy a coupon in his land of origin and sell it in a different country for a multiple of its original price. The printed value of the certificate remained the same, yet it permitted the bearer to exchange it for a stamp carrying a higher value. This is no different than a one dollar note that might buy you a small bottle of water in one country such as the USA, but buy you three bottles in a country such as Vietnam. The token or certificate, that is, the dollar in this case, remains the same. Its value, however, has dramatically changed due to geography.
Ponzi thought that he could make hundreds of percent in return; he assumed that buying International Reply Coupons in one country and selling them in another for a higher value could earn him 400 percent on his principal.
There was only one problem: Ponzi did not have any money for his indigenous idea. He thus ventured out to seek money from friends, colleagues, and acquaintances. Here is an indicator that Ponzi's offer was indeed too good to be true, he offered returns of up to 100 percent on the investors' money. 50% after 45 days and 100% after 90 days to be exact. If they had only done their due dilligence, no one would have fallen for it.
There are a number of similarities to Bernie Madoff's scheme: if Ponzi had indeed done what he promised his investors to do, namely, trade the certificates, he could have made substantial gains and a solid return for his investors. But just as Madoff, Ponzi never did such thing. He never bought and sold a certificate. Just as Madoff never actually traded on the stock market with his investors' money.
Instead Ponzi, too, used the money he received from new investors and paid old investors their principal plus interest. With every dollar invested, Ponzi's debt burden increased. One dollar of investor money meant 50 or even 100 cents of debt accrued on the money that was in fact not invested but merely shifted from one investor to another. As most people were too greedy for their own good, they, rather than take the money and be safe, „reinvested“ their hard-earned cash and life savings in Ponzi's scheme.
Who was involved in the Financial Scandal?
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, or as he was later known, Charles Ponzi.
Victims of the Financial Scandal
The total losses were a staggering $ 20 million, or in today's dollars $ 252,776,000 (as of 2020). Quarter of a billion dollars defrauded by one man, Charles Ponzi. Many individual savers and investors received nothing or only pennies on the dollar. Ponzi's scheme even brought down a number of banks, most famously the private bank Hanover Trust. Charles Ponzi had bought Hanover Trust through a very clever strategy. He deposited such a large amount of money with the bank that, had Ponzi withdrawn the money, the bank would have collapsed. He thus seized control over the bank. With his scheme's collapse, however, the bank collapse nonetheless.
Charles Ponzi was convicted for a number of different crimes, most notably his Ponzi scheme, mail fraud and larceny and spent a total of fourteen years in prison with a brief stint while he was on bail and disappeared to Florida. During his refuge he started his next scheme selling swampland. Upon his recapture and finale release in 1934, he was immediately deported to Italy, where under Mussolini he worked for Ala Littoria, the defunct Italian state airline, in Brazil. Penniless and divorced from his wife Rose, who had stayed behind in the USA, Ponzi died in 1949 in Rio de Janeiro. His name, however, lives on to describe an elaborate financial fraud.