What if I told you that there was a
way to make $200,563,872.82 in eight months?
That is the equivalent amount of money that Charles Ponzi made in 1919
when he set in motion one of the largest financial frauds in the twentieth
century. Charles Ponzi was known as a financial genius to some people, but he
was nothing more than a greedy criminal who liked to push his luck.
Ponzi
was born in Italy in 1883 and immigrated to the United States when he was
twenty. Entering the country with barely any money to his name made it very
tough to survive. His criminal
background began shortly after when he was arrested for forging a check in
Canada and sentenced to one year in the Montréal prison. Soon after he returned
to the U.S. and designed a scheme to smuggle people into the country
illegally. This also got him arrested
and put back into prison. When he was
released he headed to Boston, where he married a woman named Rose and took over
a grocery store. He obviously wasn't very good with money because the store
eventually failed and he was forced to get a very low paying job as a
translator. This is where he came up with an idea that would make him millions.
At
this time, Europe’s economy was in a very deep depression due to
inflation. Ponzi realized that he could
take advantage of the international exchange rate between the U.S. and European
countries. He would buy International
Postal Union coupons in Italy for one cent each and have them mailed to him in
the U.S., where he would redeem them for five cents each, for a total of 4
cents profit. This doesn't seem like
much, but on a large scale with lots of investors it can grow quickly, and
that’s exactly what it did. Ponzi swiftly convinced thousands of people to
invest, promising them 50% profit within just three months. All of the money
coming in from new investors allowed him to pay the old investors and keep the
scam going. This is now what we call a
pyramid scheme. It begins at the top with a single person or entity and expands
beneath (like a pyramid) with many investors coming in expecting a high profit
in return. The only people that make a profit are the ones that jump on board
very early in the scheme. Everyone else loses money in the end. A true investment has a business model that
involves a product or service to create wealth. For example, you invest in an
old beat up house with $50,000 to rebuild it and fix it up, and then sell it
for more money, creating a profit.
Ponzi became known as the “Wizard of Finance” with so much money coming in that he
made an astonishing 15 million dollars in only eight months from over 40
thousand investors. On his single best day, he made two million dollars. This made the public crazy and anxious to
know more about him. When it was first on the rise, Ponzi was able to get rid
of the press with large lawsuits, but eventually it was going to be
investigated. His scheme worked very
well, as long as there was a constant flow of money coming in, but when the
press began talking about his crimes in the past, it scared investors. People
began demanding refunds and the steady flow of new investors stopped. Without
any money coming in, he couldn't pay anyone back, causing his scheme to fall to
pieces. He ordered his employee’s to pay
off all debts, but there wasn't enough, leaving about 5 million dollars of
debt.
Investigators
were stunned to find how unorganized Ponzi’s scheme actually was. He had things recorded and filed completely
wrong with tons of missing information.
He also had so much money coming in that he had money stashed in
drawers, garbage cans, and closets.
Ponzi was sentenced to four years in prison for using the mail to commit
fraud. After he was released, he was
arrested again for his hoax, but this time charged for theft and 9 years in
prison. He posted bail and fled to
Florida, where he came up with another scam.
This time he promised a 200% profit to his clients, but was soon
arrested and convicted. He spent one
year in a Florida prison, when released, he was forced to return to
Massachusetts to serve his 9 year sentence.
After he was released, it is not entirely clear what he did next. People say that he moved back to Italy and
worked for Mussolini, but fled to Brazil after he was caught stealing money
from the government. Brazil is where he
died at the age of 66 and his funeral took his last 75 dollars.
Overall,
Charles Ponzi was a very greedy man who became addicted to scamming people and couldn't play by the rules. He created one of the largest Pyramid schemes
ever known and will always be remembered as a notorious criminal that taught the
nation a lesson about investing.
Blumenthal, Ralph. "Lost Manuscript Unmasks Details Of Original Ponzi." New York Times 5 May 2009: A21(L). Gale Student Resources In Context. Web. 27 Nov. 2012.
"Charles Ponzi." U*X*L Biographies. Detroit: U*X*L, 2003. Gale Student Resources In Context. Web. 27 Nov. 2012.
"Charles Ponzi Cheats Thousands in Investment Scheme, 1919-1920." Historic U.S. Events. Detroit: Gale, 2012. Gale Student Resources In Context. Web. 27 Nov. 2012.
"Pyramid Scheme." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. Vol. 2. Detroit: Gale, 2008. 674-675. Gale Student Resources In Context. Web. 17 Dec. 2012.