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PONZI: Source of the Scam

By   /   March 3, 2014  /   No Comments

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In 1918, Ponzi married Rosa Gnecco, and worked briefly for her father at his grocery store. The next year Ponzi attempted to start a business that sold advertising for a business catalog.

The business failed, but after it did, Ponzi received an inquiry about his catalog from a company based in Spain. Enclosed in the envelope from Spain was what was called an “international reply coupon,” which was to be used for return postage.

Ponzi learned that there was a loophole regarding these coupons, and through that loophole he believed he could make money. Ponzi discovered that the price to redeem the coupon in the United States was higher than the purchase price of the coupon in Europe.

Ponzi realized if he bought the coupons in Europe, specifically in Italy, he could, in theory, redeem them in the United States for a profit.

This is known in the world of finance as “arbitrage,” where a purchase of a security in one market is immediately resold at a profit in another market. Making money through arbitrage is not, as a financial action, illegal.

The European coupon redemption scheme was Ponzi’s ‘big idea.’

Ponzi, who now called himself “Charles Ponzi,” immediately borrowed money in Boston, and sent it back to Italy with instructions to buy the coupons and send them to him. When he received the coupons, Ponzi soon found out that redeeming them was much more difficult than he anticipated.

No matter. The red-tape was no setback for the ambitious Ponzi. It was the idea that was important. He approached several people in Boston and explained the coupon scheme. He convinced them that it was legitimate, and that he would double their investment in 90 days.

He did.

Soon, in early 1920, Ponzi started the Securities Exchange Company (yes, the S.E.C.) in Boston.

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