Charles Ponzi
One of the most notorious, but still surprisingly common confidence tricks is the great ‘Ponzi Scheme’. Investigators, criminologists and economists consistently express amazement that this simple, yet evergreen scam can still reap such lucrative rewards. The greatest fraud in modern history, the Bernie Madoff episode, netted a breathtaking $65 billion, and Madoff owes his pedigree to the man who gave his name to the mighty pyramid scheme, Charles Ponzi.
The Ponzi Scheme works on a simple but powerful formula. Greed drives every successful confidence trick, and the willingness of otherwise intelligent and educated people to suspend their disbelief in the interests of quick and healthy profit never seems to fail.
Charles Ponzi had a particular angle on this scheme. Born in Parma, Italy in 1882, he arrived penniless in Boston in 1903. Like most immigrants, he began work doing odd jobs, passing off bad checks as a sideline, which earned him three years in a Quebec prison. Another two years was spent in prison in Atlanta for people trafficking, before he finally alighted on the idea that would make him a fortune.
One day he received a letter from a Spanish company that contained what was known then as an International Reply Coupon. This, in essence, allowed the receiver to purchase stamps at the expense of the sender by cashing the coupon in at a local post office. Ponzi realized that the amount laid out in Spain, or Italy for that matter, was much less than the cost of the stamps in the United States, so he began to organize a network of suppliers abroad to send him IRCs, which he used to buy stamps, which he then sold for a profit.
It was a simple, and reasonably legitimate business model, but to ramp-up sales, he offered access to the scheme by investment, and this very quickly morphed into a pyramid scheme. Promising investors the usual outrageous returns, he slipped into a pattern of attracting investment and paying the promised return by exploiting new investment. This, of course, is a commonly understood principal now, but then, in the freerolling, capital-heavy days before the great stock market crash, it was a new idea, and Ponzi made a fortune.
As, of course, was inevitable, the scheme began to unravel as the press began to investigate the astronomical returns. The investigation triggered a run on Ponzi’s company, and inevitably it collapsed. Ponzi was arrested on August 12, 1920 and charged with 86 counts of mail fraud. He subsequently spent 14 years in prison, and he died penniless in Rio de Janeiro in 1949.
Charles Ponzi may have made and lost fortunes, but the genius of his scheme lies in its simplicity. For so long as man is driven by greed, the sleight of hand and slick tongue of men like Charles Ponzi will seduce investors to put their hands in their pockets and hand over the loot in pursuit of quick and easy profit. It never lasts forever, but while the going is good, it is very good indeed.
