In less than eight months, Charles Ponzi managed to swindle $15 million from investors.
Ponzi schemes are a type of investment fraud. They are unfortunately quite common. To give a simplistic definition, a Ponzi scheme is often presented as a risk-free investment opportunity with a high return on investment.
Sometimes these schemes claim to be some sort of actively managed fund. In recent years, many Ponzi schemes have been linked to cryptocurrencies. Despite the many types of Ponzi schemes, these scams still work the same way.
Scam artists present their potential victims with an investment opportunity that seems too good to be true. Often, the scammer promises investors a 20% return on investment on their initial investments. This fantastic promise attracts the victims hoping to increase their savings.
As is often the case, if something seems too good to be true, it is. These “investments” do not generate incredible returns. Instead, the crooks borrow from Peter to pay Paul. By using one investor’s money to pay another investor, scammers trick their victims into thinking their money is safe.
An example of a Ponzi scheme is the one run by Bernie Madoff. Over the course of seventeen years Madoff has stolen billions of dollars from investors. Madoff was sentenced to 150 years in prison in 2009 after his scam came to light.
Although the Madoff scam was one of the most infamous examples of a Ponzi scheme, it was not the first. In fact, this type of fraud has been around for centuries.
“The man who is admired for the ingenuity of his larceny almost always rediscovers an earlier form of fraud.”
— John Kenneth Galbraith
One of the first recorded Ponzi schemes was committed by William “520%” Miller in 1899. Miller was an accountant in Brooklyn who managed to take over a million dollars from unsuspecting clients in less than a month. year. When the fraud finally came to light, Miller shot to fame. Although most people were disgusted by Miller and his theft, some were inspired.
One of the people who would later attempt to replicate Miller’s crimes was a man named Charles Ponzi.
Charles Ponzi was born in 1882 in Lugo, Italy. His ancestors were aristocrats, but the family had lost their wealth by the time the Ponzi was born. Charles grew up watching his parents struggle financially.
At the start of the 20th century, there was a trend of young Italian men leaving for the United States. Sometimes these men returned with massive fortunes they had made in America. Charles saw how well men his age had done in the United States. He wanted this for himself.
“I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes have never left me.”
— Charles Ponzi describes his arrival in the United States
Ponzi arrived in Boston on November 15, 1903. He needed to find a way to support himself. He was a waiter in a restaurant for a while but was fired because he kept cheating customers. Charles Ponzi traveled across the United States for over a decade, doing odd jobs here and there to make ends meet.
In 1917, Ponzi returns to Boston. He had read an ad in a newspaper about a Boston company looking for a new clerk. Ponzi hoped the job would pay well. He got the job, but was eventually fired for poor performance. Despite his dismissal, Ponzi remained in Boston.
He had met a woman named Rose Gnecco on a streetcar, and the two had fallen in love. The couple married in January 1918.
Shortly after getting married, Ponzi had an idea that could have made his dreams of wealth a reality.
One day, Ponzi opened a letter from Spain. The letter contained an unused Spanish postage stamp that Ponzi was to use to write a response to the letter. If Ponzi had gone to a post office with the stamp, he could have exchanged it for a US postage stamp.
Ponzi realized that the Spanish stamp was about 10% cheaper than an American stamp. In theory, it was possible to buy a large number of stamps in Spain and then exchange them in the United States. Ponzi thought he could make a big profit out of it.
Ponzi started a business he named Stock exchange company. He started telling others about his business plan and started looking for investors.
Ponzi claimed he recruited agents in Europe to buy stamps from him wholesale. The agents were then supposed to send the stamps to the United States, where Ponzi would buy them back for a profit. He was always very discreet about the most practical details. Ponzi claimed the reason for its lack of transparency was that it did not want competitors
Despite the suspicious details, Ponzi managed to convince thousands of people to invest. In less than eight months, the Ponzi company had fifteen million dollars in investments.
In reality, there were no agents in Europe. Ponzi realized he could make a lot of money from his investors without having to deal with the logistics of transporting stamps from Europe to North America. He could just use the money people gave him to pretend he had a legitimate business. Ponzi took money an investor gave him to give “returns” to another investor.
Ponzi quickly made a name for itself. This charismatic man had managed to make a fortune in just a few months. Everything was very impressive. Almost too impressive…
After a while, people started to be suspicious. If Ponzi had really succeeded in making millions stamps? Newspapers started running stories wondering how Ponzi had given investors such incredible returns in a very short time. Former Ponzi associates began to sue for debts he never repaid.
Although Ponzi fought back against the charges, the general public grew suspicious of him. Many Ponzi company investors wanted to withdraw their money. The Boston post sent undercover reporters to investigate Ponzi schemes, and the police also began to take an interest.
Everything collapsed on July 26, 1920. The Boston post published an article that exposed the Ponzi business model. If the Brokerage company had made money by buying back foreign stamps, they should have bought back 160 million stamps. There were only 27,000 stamps in circulation in the United States
After the article, there was another rush of investors wanting to withdraw their money from the SECOND. He had to shell out $2 million in three days. Ponzi was finally stopped on August 12. Bail was set high due to fears he is trying to flee the country.
Subsequent investigations into the Ponzi finances showed that he was twenty million dollars in debt. That would equate to around $200 million today. Ponzi spent fourteen years in prison before being released. After divorcing Rose in 1937, Ponzi moved to Brazil.
He died in 1949, at the age of 66.