Charles Ponzi

FINANCIAL HISTORY

CHARLES PONZI

After arriving in the United States in 1903 with two dollars and fifty cents in his pocket, Charles Ponzi moved from job to job looking for various opportunities.  Although several of his opportunities and schemes got him fired and some even landed him in prison, Charles would bounce back and move on.

By early 1920, Ponzi decided that pricing inefficiencies in International Reply Coupons (a type of postage for international correspondence) presented an opportunity to make money.  Charles believed that he could borrow money from investors, use that money to buy International Reply Coupons in Spain or Italy where the Coupons were cheaper, have them sent to the U.S., redeem them for U.S. postage stamps that had a higher value, and then sell the U.S. postage stamps for cash.  He claimed that his return would be more than a 400% after expenses and exchange rates. 

To get people to invest, Ponzi offered a 50% return in 45 days, or “double your money” in 90 days.  At first he solicited from friends and associates and by February 1920 he had taken in $5,000.  As more money came in, early investors were paid off and the word quickly spread.  By March he had taken in $30,000 and had hired agents to solicit more investors.  In May of 1920, Charles had raised more than $420,000.  Eventually people began mortgaging their homes and investing their entire life savings, and by July of that year, Ponzi had brought in several million dollars.  On July 24, 1920 it was reported that he was bringing in $250,000 a day.

Charles of course took advantage of his new wealth and began living luxuriously.  His ‘rags to riches’ status made him a hero among the Italian-American community and he was cheered wherever he went. 

Ponzi’s International Reply Coupon scheme may have begun innocently enough.  However, by some accounts, he never invested more than about $30 in the coupons and never actually made any money by exchanging them.  As long as new money kept coming in he was able to pay the prior investors who would often just reinvest with him.  But as all pyramid type schemes eventually fail, so did Ponzi’s. 

The Boston Post contacted financial analyst Clarence Barron who began to publicly examine Ponzi’s financial operations and ran stories on his conclusions.  By August 13, 1920 Charles Ponzi was arrested and his exchange company shut down.  Surprisingly, some of his victims were outraged at the officers who arrested him and in spite of the revelations against him many still regarded him as a hero. 

Charles Ponzi was certainly not the first to defraud investors by using money from later investors to pay high returns to earlier ones but he was the first to do it on such a broad scale.  Thanks to his success as a swindler, the term ‘Ponzi’ is used to refer to any scheme using similar techniques. 

Unfortunately, Ponzi schemes are alive and well today.  Instead of International Reply Coupons, many of today’s Ponzi schemes are centered on real estate, currency exchange, lending pools, the internet and even unlicensed financial advisors.  Some of the more successful ones have been able to operate for over 20 years before collapsing.  As recently as March of 2008 an Ogden, Utah man plead guilty to charges relating to what investigators called “a massive Ponzi scheme” bilking at least 800 people out of more than $180 million.

Perhaps Warren Buffett put it best when he said recently, “What we learn from history is that people don’t learn from history.”

(Writter By Kimber Heaton - Certified Financial Planner)

Reference:  http://en.wikipedia.org/wiki/Charles_Ponzi