Charles Ponzi- A Fascinating Financial Wizard

“I went looking for trouble, and I found it”- Charles Ponzi

People from all walks of life have demonstrated their capacity to ignore common sense and believe in something that is simply too wonderful to be true by falling for the con man’s lure time and time again. With $2.50 in his pocket and hopes worth $1 million, Charles Ponzi went on to be known as one of the most notable scamsters in the history of mankind. Just like any other immigrant with eyes full of aspiration, he too wanted to experience the “American Dream”. But his idea of the American dream and opulence eventually turned out to be a nightmare for millions of people.

Born into a family in Lugo, which eventually went from riches to rags, Charles Ponzi had very little inclination towards college education. Hence, he ended up broke without a degree. When his money ran out, Ponzi concluded that heading west was the best option. His family encouraged him to migrate to the US, as a lot of young Italian boys were moving to the country with the hope of coming back to Italy as rich men. He walked down the gangplank of the SS Vancouver in Boston Harbor on November 15, 1903. However, the road to riches that Ponzi dreamt of was a long one. He worked as a waiter and busboy in New York City, painted signs in Florida, and ran errands all around the East Coast.

In 1907, Charles decided to move to Montreal in Quebec, Canada, as he had achieved nothing but failure in the US. He became an assistant teller at the newly formed Banco Zarossi, a bank on Saint Jacques Street founded by Louis Zarossi to serve the city’s influx of Italian immigrants. Ponzi had developed a winning demeanor and was fluent in English, Italian, and French at this time, which helped him land the position at Banco Zarossi. This was the very first place where Ponzi had encountered the scheme of “robbing Peter to pay Paul”. Eventually, Banco Zarossi turned to ashes due to bad debts and the abscondment of its founder with the bank’s money.

Charles stayed back in Montreal with the intention of helping Zarossi’s family, which he had conveniently abandoned. However, he didn’t have the means to provide for the Zarossi family. He eventually strolled into the offices of Canadian Warehousing, a previous Zarossi customer, and while no one was present, he wrote himself a check for $423.58 in a cheque book he discovered, faking the signature of Damien Fournier, a director of the firm. When confronted by the police, Charles Ponzi pleaded guilty and was imprisoned for 3 years. While leaving for the US, he got involved in the activity of smuggling illicit Italian immigrants across the border, which led to his imprisonment for 2 years in Atlanta.

In 1917, he returned to Boston and began working as a nurse at a mining camp. While working in the mines, he learned about Pearl Gosid, a nurse who had suffered serious burns and required skin grafting as a result of an accident. Charles had no clue who she was, yet he chose to donate 122 inches of his skin for two major procedures despite knowing nothing about her. Charles developed pleurisy as a result of this, and he eventually lost his job.

He met Rose Gnecco, a vibrant young girl, seventeen years his junior, and swept her off her feet. Charles Ponzi married Rose in the year 1918 and took over his father-in-law’s grocery business, but alas, he ended up creating chaos out of it. Charles didn’t take long to strike out on his own, and he eventually devised the plan that would make him rich beyond his wildest dreams—at least for a while.

The Rise of Ponzi

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In the year 1919, Charles Ponzi set up a little office in School Street, Boston. His business plan revolved around generating revenue by providing business ideas to his contacts in Europe. He conceived the concept for an international trade publication, which he felt might generate a sizable advertising revenue. However, Hanover Trust Company, the bank where he applied for a $2,000 loan, refused. Charles’ well-oiled wheels of creativity went into overdrive after receiving a little paper square from a business correspondent from Spain who was eager to know more about Ponzi’s abandoned journal.

The small slip of paper was an international postal return voucher, also known as International Reply Coupon (IRC), which the Spanish correspondent had included as a kind of reply to postage prepayment. A person in one nation might pay for the postage of a reply to a correspondent in another country using postal reply coupons. It may be redeemed for a 5-cent US postage stamp purchased in a Spanish post office for 30 centavos, a redemption rate set by international convention. However, Ponzi was aware that the Spanish peseta had lately depreciated against the dollar. Potentially, somebody who purchased a postal reply coupon in Spain might claim it in the United States for around a 10 percent profit. He concluded that purchasing coupons in nations with weaker economies may significantly boost that margin. Buying large volumes of these coupons in particular foreign nations and redeeming them in countries with stronger currencies should, therefore, enable one to make a monetary profit. This was a legal way to arbitrage — gaining by purchasing an asset at a cheaper price in one market and instantly trading it in a market where the value is greater. Ponzi saw an opportunity and abandoned his work as a translator to launch his IRC scam, but he required a large sum of money to acquire IRCs in lower-performing European currencies. He attempted borrowing money from institutions, including the Hanover Trust Company, but they were skeptical, and its manager, Chmielinski, declined his request.

This is when Charles Ponzi decided to take matters into his own hands and founded the Securities Exchange Company. The objective behind this company was to raise funds from the general public by promoting his scheme, where he promised to increase their investments by twofold in ninety days. This scheme was very eye-catching for individuals as the bank only provided 5% interest unlike Charles who promised a whopping 50% interest rate in 45 days. In the first month, 18 people invested a total of $1,800 in his firm. He swiftly reimbursed them the next month, using funds collected from the newest group of investors. Ponzi engaged agents to find some new investors in New England and New Jersey as the operation progressed. Investors were being paid attractive rates at the time, which attracted others to contribute. He had earned $420,000 by May 1920. People had put $2.5 million into Charles’ scam by June 1920. Ponzi was still repaying investors, largely with money from new investors, but he had not yet found out how to convert the IRCs to cash. He then discovered that converting the coupons to money was logistically impossible.

Charles Ponzi had accumulated so much wealth that he owned a 12-room estate in posh Lexington, staff, a couple of vehicles, including a custom-built limousine, and exquisite apparel and gold-handled canes for himself, as well as diamonds and other trinkets for Rose.  He bought commercial and rental buildings across Boston, as well as shares in several institutions.

To profit from the gold rush, Joseph Daniels, a Boston furniture merchant who had loaned Ponzi items he couldn’t afford, sued him. Although the case was unsuccessful, it prompted others to wonder how Ponzi went from bankrupt to rich in such a short period of time. Some investors withdrew their money from the Securities Exchange Company, causing a run. Ponzi paid them, and the heist came to an end. Right after this incident, The Boston Post, a newspaper, printed an article that was in favour of Charles Ponzi and highlighted that his scheme was legit, and he wasn’t lying when he said he’d double people’s investment in 45 days. This enticed more people into investing in the scheme, hence making Charles a richer man.

Notwithstanding this respite, Boston Post acting publisher Richard Grozier (who was handling the daily in the absence of his father Edwin, the owner and publisher) and city editor Eddie Dunn were distrustful of Ponzi and dispatched investigative reporters to dig into the matter. Ponzi was also under investigation by Massachusetts authorities, and he met with state officials on the day the Post published its piece. By proposing to cease receiving money throughout the inquiry, he was able to deflect the investigators’ attention away from his books, which was a good move given the lack of appropriate records. Ponzi’s offer momentarily assuaged state officials’ worries.

The Fall of Ponzi

While Ponzi was able to mislead the public for a while with his distractions, public pressure was building. The Boston Post and financial journalist Clarence Barron had raised suspicions regarding Ponzi’s business and had investigated claims made. The result of their investigation revealed Ponzi had no significant inventory of IRCs, and even if he had, the necessary coupons to satisfy millions of dollars’ worth would need to be mountains of coupons— that would exceed the quantity available globally.

Things started changing quickly. Federal agents and postal inspectors were now watching and investigating Ponzi. He was arrested on August 11, 1920, and charged with several counts of mail fraud amongst others. The scale of investigation, once completed, determined Ponzi’s liabilities to be about $7 million, and his assets were not even worth a quarter of it. It was one of the most astonishing financial collapses in American history.

Public outrage was huge. Thousands of investors lost their life savings. Some investors, disillusioned and ashamed, didn’t file claims. Others filed suit, ultimately resulting in what was left of Ponzi’s assets form the creditor’s suit. His devoted wife Rose initially was supportive, but the result of the disgrace took its toll on the defunct couple.

Ponzi was sentenced to five years in federal prison, but even behind bars, he charmed fellow inmates and prison officials alike. After serving his sentence, he was re-arrested by state authorities and tried on additional charges. He spent another seven years in prison, followed by a lengthy legal battle over deportation.

In 1934, Charles Ponzi was finally deported to Italy, arriving in a country vastly changed by fascism and economic instability. He drifted through a series of small-time jobs, including an attempt to work with the Italian government as an economic consultant, which quickly failed.

Ponzi eventually settled in Brazil, where he worked as a translator for an airline company. He spent his final years in poverty, living in a charity hospital in Rio de Janeiro. On January 18, 1949, Charles Ponzi died alone and nearly forgotten, his name immortalized not for success, but for the fraudulent investment scheme that still bears his name.